Following our webinar ‘Why insurers can’t afford to be ESG (environmental, social and governance) spectators’, we’ve summarised the content into eight key points that should help insurers respond to the risks – and opportunities – of the growing scrutiny of their performance and identity through an ESG lens.
Let’s begin with the rationale for our webinar title. ‘Why can’t insurers afford to be ESG spectators?’
First off, our focus is on the letter – “E”. According to the Energy and Climate Intelligence Unit Net Zero Tracker, 54% of global emissions were covered by net zero commitments by July 2021. The push to achieve net zero emissions, and the economic and social transition that will be necessary to do so means that value, financial and client worth, in their widest sense, are being re-evaluated.
A notable feature of the COP26 meeting in Glasgow in 2021 was, for example, the heightened participation and interest of the finance sector in driving net zero ambitions and targets. Large scale investors are becoming fully attuned to assessing climate-based risks and returns. And from an insurance perspective, the “E” focus, predominantly arising from the frequency and increased severity of natural catastrophe events, has heaped further pressure on the need to try and bridge the protection gap with company values and sustainability in mind.
Another reason; regulators. Regulators around the world have the bit between their teeth on ESG issues. It’s the sign of the times, and more so than ever, as more regulatory bodies are pushing the ESG agenda by making reporting based on the Taskforce for Climate-related Financial Disclosures (TCFD) framework mandatory. Indeed, the pace at which ESG and climate regulation is changing, and new initiatives and reporting requirements are being brought to the board room table, can be perplexing to navigate. This must be the reason for a company to dig deeper in of itself.
And finally; the catch all, stakeholder management. Managing ESG with a broad church of just about everyone that an insurer interacts with requires meticulous expectation management; from shareholders who want to see evidence of ESG plans and actions, to employees that want to work for a ‘responsible’ employer, and to the public at large who are basing buying decisions on a changing value scale. Current and future clients are increasingly considering the actions and reputation of companies in their decision making and perceptions.
The implications for insurers are broad and deep, but at a high level are likely to include timely and well thought out actions on:
Here are eight broad tips that we believe will help set insurers on their way or, more likely, advance their ESG agenda so that they are not in danger of being left on the ESG side lines – to take the full brunt of the risks and not miss out on business opportunities:
The E, the S and the G of ESG encompass a wide and diverse range of factors that an insurer may need to consider. But the factors will vary based on company size and history, ownership structure, product mix, geographic focus and investment strategy, to name a few.
So, an important first step is to work out what ESG means to “you” and as an organisation, what is commercially viable and achievable. What factors are important? What is your motivation on ESG matters, and what perspective do you approach the issues from; business focused or more skewed to the ‘good of society’? Does ESG fit into your existing business values and culture, and how can you assess and monitor it?
We have found that a good starting point here is to evaluate what has already been done, what aligns with your future ambitions, and to create an ESG “risk and opportunities” register as part of the overall risk management strategy. This can then be evaluated against the ESG landscape to assess materiality and any potential internal constraints to prioritise and realise different parts of the strategy.
ESG is ubiquitous to an insurer’s operations, it needs a connected approach that brings consistency across the business. Imagine a scenario, for example, where a decision has been taken to specifically incorporate human rights in underwriting strategy, in line with employee survey feedback on the importance of social justice to employees, but the same insurer is working with or investing in a company with disputed labour practices.
Cross-department team collaboration, including human resources, is the way forward for developing a cohesive ESG strategy and enabling pragmatic, workable methods to implement the strategy within all parts of the business.
Yes, regulation and reporting requirements are a significant factor in the changing ESG landscape and insurers may understandably need guidance to work out what can be a picture of many parts. But, going back to our first point, as much as meeting these requirements is important, these should not be the driver of your ESG approach. It’s also worth noting that because ESG regulation is relatively new - even in the most developed markets, it is also being influenced by many initiatives already underway. There is potential to help shape the future regulatory landscape.
Metrics such as carbon pricing, carbon offsetting and so on don’t exactly equate to the financial impact of climate transition. The key to augmenting such metrics and thinking about the risks and opportunities of economic and social transition is the impact on demand, prices, value and future cash flows. Furthermore, when looking at investments and asset strategies, companies with high investor ESG scores can still be exposed to climate transition risk – and many of those are likely to have been motivated to move more quickly with that in mind.
Many insurers of course, particularly those with greater exposure to natural catastrophe events, have sophisticated modelling approaches in place for physical climate risks. Nonetheless, the wider remit of ESG effects and the limited extent to which many existing models consider future transition scenarios means that insurers face challenges on some of the assumptions and their application.
Best practice in ESG metrics will involve not only considering what’s important from a top down and bottom-up exposure management perspective but thinking through the information that can be used to add context and texture to transition scenarios.
While we continue on the journey to net zero, the global economy still has to function. The current reliance on fossil fuels as a source of energy, adaptation to greener products and the evolution of more circular product review cycles will all have to go through governance. Insurers will need to take a view or seek advice on how such changes might unfold under different climate and economic scenarios.
Although we’ve touched on this a couple of times, it’s worth stressing again that the greater focus on ESG issues carries real opportunities for insurers – in terms of investment strategy, underwriting strategy, product development, employee perceptions, reputation and more. The ability to fully capture those opportunities will stem from an open, collaborative and inclusive ESG strategy framework that employees welcome and feel part of.
While the selection of eight tips is purely coincidental, octopus-like tentacles are a useful metaphor for how ESG strategy is likely reach into the nooks and crannies of any insurance business. Even so, our experience shows that knee jerk reactions are just not pragmatic, or a realistic response to the growing need to demonstrate progress to a wide variety of stakeholders, such as the effects of a change in underwriting strategy on claims reserving.
Instead, building these points into a multi-year roadmap that considers the implications from within the business has to be an iterative process. For insurers, who are increasingly being thrust to the centre of climate and ESG discussions because of their role in both providing risk capital and as major investors, the window for sitting back and seeing what others are doing is starting to close. The regulators’ tentacle may just be an unwelcome visitor.
The greater focus on ESG issues carries real opportunities for insurers