Aviation insurance has a role in making ESG simpler

Companies across virtually every industry are increasingly encouraged to think about how they do business through the lens of their potential environmental, social and governance (ESG) impact. ESG policies are increasingly central to strategic development at an organizational, sector, regulatory and governmental level.

There is currently a challenge. As everyone strives to define their responsibilities and prove the contribution that they are making to the overall effort, they are creating a myriad of different reporting mechanisms. In some ways these different reporting mechanisms are making it difficult to ascertain the best way of moving forwards.

This is particularly true where it comes to the environmental aspects of ESG, which has particular relevance for the aviation industry as it tries to reduce carbon emissions.

In this short article, we will examine the challenges that the environmental aspects of ESG faces and briefly explain how the insurance sector can offer useful perspectives and support.

How many is too many?

With increasing acceptance that human activity is having an impact on the Earth’s changing climate, many organizations have been trying to accurately gauge their impact, not least so that they have a baseline that enables them to report any improvements that they make.

Without a globally accepted metric that everyone can adhere to though, some organizations are looking at their impact one way and some another, while governments and regulators are analyzing the same challenges in completely different ways. According to a February 2020 report by KPMG, there are more than 150 data vendors currently offering ESG performance measures, “…each with their own proprietary definitions and methodologies on materiality, intentionality and additionality.”¹

This is creating a situation where even when organizations are demonstrably trying to do the right thing, their progress is being slowed by arguments about measurement. We could be reaching a point where the sheer volume of ESG metrics is forcing organizations to spend time and resource on reporting rather than focusing on innovating and finding ways to meet the current challenges.

The risk of confusion

In some ways this risk is already becoming a reality. As we discussed in this recent article,² governments and companies all over the world face an increasingly active and litigious set of environmental organizations. Many are trying to be proactive by changing policies before they face the risk of legal action.

The government in the Netherlands recently announced that it was reducing flight capacity at Schiphol airport as part of its ambitions to cut air and noise pollution.³ Several aviation associations have reacted to the constrictions including the International Air Transport Association,⁴ but making an argument based on a set of ESG metrics that are recognized by both the industry and governments could potentially lead to a far quicker resolution.

The risk of pushback

At the same time, the lack of clarity can lead to confusion, frustration, and resistance to the very concept of ESG. In recent months law makers in the state of Texas in the US have been discussing an outright ban on insurance companies that use ESG metrics in their risk assessment processes.⁵

There are several factors in the debates in the state legislature, but the fact that it is being discussed is a complicating factor in the development of the ESG structure, which in some ways has been created to offer a framework that brings together and simplifies responses to a complex set of challenges.

Some regulators and governments including the European Union⁶ and the US Securities and Exchange Commission⁷, are issuing opinions and consulting on ways to regulate some aspects of ESG rating organizations, but these processes tend to be slow and considered and in the meantime confusion and the potential for pushback continue to exist.

Four ways that the insurance sector can help

Insurance has the potential to play a strong, proactive role in the development of ESG and the potential consolidation of metrics.

What it means for aviation

The aviation sector needs to adapt existing technologies and bring in several new technologies if it is going to meet the targets that it is setting for itself and those that are being set for it. The insurance sector can play an active role in supporting these technologies through the development, testing and sales stages.

Changing the way that industries operate to meet the challenge of climate change will involve both time and investment, and the best route to success will be focusing on areas where there is the most impact with the least distraction from day-to-day activities. The current plethora of metrics is complicating the process of finding the most efficient route through the challenges ahead.

Various governments have stated that they intend to take their economies to net zero by 2050, and it could be argued that the lack of a single global reporting standard has the potential to hold progress back. The insurance sector can play an active role with governments, regulators and businesses including aviation, as they strive to reduce their carbon impact.