June 13, 2022 ESG & Reputational Issues Trickle Down

Big brands are looking to do business with the industry suppliers that can help them achieve their reputation and ESG goals.

By Nir Kossovsky, CEO, and Denise M. Williamee, VP of Corporate Services, Steel City Re

Reputational issues are different for a national consumer bank than they are for the company that engineers the anti-money laundering software that enhances security and keeps the banks in compliance. They’re different for an automaker than for the company that builds the low carbon emitting engines that automaker installs in its cars. They’re different for a supermarket chain than for the white label food manufacturer that provides sustainably raised store brand products.

They’re different because public facing brands that are magnets for interest by media, social media, politicians and regulators need to think expansively and continuously about who their stakeholders are, what those stakeholders expect, how those expectations are changing. Most critically, they need to think about the costs of failing to meet those expectations.

That, including insurance for those costs, is the essence of reputation risk management and its governance.

For manufacturers and other industrial companies that fly beneath the public radar, the questions are the same. Their reputations depend largely on whether they are providing quality products to their customers, whether they can attract and retain the workforce they need, and whether they are meeting applicable legal and regulatory requirements. However, they face an additional hurdle. They need to think about whether their own reputational risks pose reputational risks for their customers – in the minds of their customers’ customers – and the potential costs of those risks.

In the past, hidden brands with superior reputations were revealed by their customers and positioned as an added value: consider, “Intel inside.” Today, there’s a new equation and the added value lies in reputation risk management. With weaponized social media, traditional media, stakeholder capitalism, and environmental, social justice and governance (ESG) issues posing new reputational risks to the more public facing businesses, the less visible companies supporting those brands are experiencing new challenges – and looking at new opportunities – to add value to the companies they supply.

The challenge:

As the public-facing brands set stakeholder expectations and stake their reputations on ever more ambitious ESG goals, they are going to look up and down their supply chains and expect the same of their suppliers, vendors, and consultants. A supplier with an excessive carbon footprint, for example, could undermine the more visible company’s publicly stated climate goals. A supplier with an all-white board of directors and C-Suite could undermine their client’s statements about its commitment to diversity and inclusion.

One need look no further for evidence of this reputation risk by association trend than in the protests and activism against banks that do business with fossil fuel companies.

What will be next? What if a large, well-known company that supports its employees’ right to have an abortion decides by order of its board that it will only do business with suppliers that also support that right? Can its suppliers–can any supplier–respond thoughtfully and prudently to such a Jack-in-the-Box risk?

Whether it’s abortion rights, voting rights, gay rights, gun rights, climate change, or the Black Lives Matter and “Me Too” movements, hot button social issues are going to remain high on the reputational agendas of big brands. So are the more established environmental issues such as carbon foot print, green-house gasses, and sustainability. The reputational risks arising – and the steps taken to mitigate them – are going to affect more than those consumer-facing companies alone; they are going to affect those companies’ entire ecosystems.

Therein lies an opportunity:

For companies that have never considered reputation risk management a priority — we’re talking to you: risk manager, senior counsel, operations officer, or CFO – think about it now as a potential differentiator and a competitive advantage. Being able to demonstrate that you are managing your reputational risks appropriately, especially with respect to ESG, will, at a minimum, reassure your clients that your reputation is not going to place your clients’ reputations at risk. At best, demonstrating publicly authenticated reputational risk management could boost both your value and that of your client.

That requires having a process in place for being sure you understand stakeholders’ expectations, which can change over time or in an instant, and how they align with your actual performance. If you are like most manufacturers today, you understand process well. You honed your understanding at the dawn of the quality movement when the acronym was TQM.

Today the acronym Is ESG, and the expectations for it may exceed your capabilities. When there are gaps, can they be filled or do expectations need to be managed? Is there operational and governance oversight of these risks? Where does accountability lie? Can financial risks associated with reputational crises be offset with reserves or reputation insurance products?  

As was true at the outset of the quality movement, today, companies with robust, authenticated processes in place to manage social and reputational risks, whether called ESG or by another name, are rewarded material ways. In fact, a recent analysis by Steel City Re found that companies with strong reputation risk management processes outperform their peers in the aftermath of a crisis.

That “reputation premium” doubles when they’ve communicated about their process publicly – telling a simple, compelling story about good governance, backed up by ESG insurance, reputation insurance or other forms of validation by outside parties.  That reputational premium translates into confirmation for reputation-sensitive clients, customers and business partners that they are not going to incur reputational risk as a result of this relationship.

End users want to feel good about the products they buy, and the big brands that strive to appeal to them want to be able to say that they source their goods by environmentally and socially conscious means. They’ll be looking to do business with the suppliers, vendors and consultants that can help them achieve that end.

Nir Kossovsky is CEO of Steel City Re, which uses parametric reputation insurances, ESG insurances, and risk management advisory services to mitigate the hazards of ESG and Reputation risk. nkossovsky@steelcityre.com

Denise Williamee is Steel City Re’s vice president of corporate services. dwilliamee@steelcityre.com

www.steelcityre.com

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