Building the Business Framework

Momentum is building to require financial services entities to disclose how they are incorporating sustainability risks in their decision making, investments and products.

As part of that, the European Union’s Sustainable Finance Disclosure Regulation came into force in March 2021.

Domestically, political observers expect recently appointed U.S. Securities and Exchange Commission chairman Gary Gensler to take action on the subject this year. The SEC for the first time has a senior policy advisor on climate and ESG, signaling the critical role that climate change is expected to play in the SEC’s policy and compliance agenda for the foreseeable future.

As financial services entities like banks, investment funds and insurers include client ESG factors in their decision making, the onus is on these businesses to have a framework in place to help them identify, assess, measure and report on their climate-related risks. New York University’s Stern School of Business can help insurance brokers assemble this framework for clients.

The school’s Center for Sustainable Business has created a methodology it calls ROSI—Return on Sustainability Investment—determining the tangible and intangible financial benefits of investing in various sustainability initiatives. Tangible benefits could be an increase in sales or reduced turnover, whereas intangible benefits could be more appealing marketing cachet. In all cases, these benefits are calculated and quantified.

“In today’s environment, there’s growing demand for insurance brokers to understand their clients’ risks to climate change,” says Elyse Douglas, senior scholar at the Center for Sustainable Business. “What used to be normal isn’t normal anymore. If they’re looking for ways to model these sustainability risks, ROSI is a good fit.”

Douglas, the former CFO at rental car company Hertz, described ROSI’s primary utility as a forecasting tool. She provided the example of an automaker client looking to assess, quantify and invest in the financial and societal benefits of making electric vehicles over different time horizons—three years, five years and 10 years.

ROSI suggested improvements in productivity the sooner the company made more electric vehicles, as this decision closely aligned with its employees’ values. In turn, this would enhance the company’s reputation as a sustainable business, potentially improving its messaging, sales and cost of capital. “ROSI offers a way for corporate management to embed sustainability into their core business strategy and decisions, by quantifying the full range of costs and tangible and intangible benefits,” Douglas says.

Another industry example in which ROSI helped paint a clearer picture of sustainability is the apparel sector. Partnering with three apparel companies—Eileen Fisher, Reformation and REI—the Center for Sustainable Business estimated the benefits that would accrue to the companies by making strategic investments in chemical and waste management, sustainable raw material sourcing, and product reuse, remanufacturing and recycling.

At REI, the analysis generated a $13 million productivity increase and a $27 million reduction in hiring and turnover costs in 2019. The reuse of products in apparel making alone generated a net benefit of $1.8 million for Eileen Fisher. All three companies generated positive publicity, preserving their corporate reputations. By disclosing these actions as part of their ESG profiles, the companies theoretically were better positioned to enhance their sustainability factors to investors, banks and insurers. By partnering with the Center for Sustainable Business or other consulting organizations focusing on identifying and measuring ways to achieve the optimal return on investments in sustainability, insurance brokers can enhance their value proposition at a time when climate change poses substantial and continuing client risks.