Adding the ‘S’ to ESG: why insurers can make a difference

But the industry is uniquely positioned to support the world’s transition to a sustainable, low-carbon economy–—while also developing increasingly sophisticated risk transfer tools to help manage this issue.

Those are just some of the views of Tricia Hobson (pictured), partner at DLA Piper, an industry leader with more than 25 years’ experience in claims, complex litigation, cross-border disputes, investigations, and arbitrations.

Hobson was speaking in advance of a special virtual webinar hosted by Intelligent Insurer titled “Embrace ESG: Discover what tools and policies are available to insurers”, which will take place at 2:00pm BST on June 13, in association with DLA Piper, and will feature speakers from Zurich, SiriusPoint and Steel City Re. To sign up to watch that webinar, click here.

The webinar will examine how re/insurers are increasingly positioning themselves at the cutting edge of embracing, using and setting standards relating to SESG. This topic will explore how re/insurers are using technology to help them implement standards and create policies which can help society better manage challenges such as climate change while ensuring re/insurers implement the highest possible SESG standards.

Hobson explains to Intelligent Insurer why she thinks this issue is important–—and why DLA Piper has added the ‘S’ to ESG.

What does SESG mean to you, and what is the ‘S’ at the start?

ESG means environmental, social and corporate governance. This simple acronym covers an enormous field of topics.
At DLA Piper we speak about SESG to introduce sustainability as an overarching important consideration. While the identification, assessment and management of ESG factors is often what gives rise to an initial demand for legal services and advice, we want to help our clients work towards the objective of transitioning to a sustainable way of doing business for the long term.

Enhancing sustainable strategies, performance and reporting and navigating the transition to a low-carbon economy must be driven by a set of clearly defined values and corporate purpose. Embedding a culture of sustainability and accountability will better equip businesses, investors, policymakers and other stakeholders to confront the complex strategic, legal, financial and operational sustainability opportunities and change.

We view sustainability as the ability of businesses and other stakeholders to create value over the long term in alignment with the ESG topics relevant to their sector and business.

Environment-related factors are only part of the picture: social and governance elements are also increasingly being seen as key drivers of success. For some companies, protecting human rights, and considering long-term impacts on local communities are becoming crucial. Actions such as linking executive remuneration to delivery of EGS targets can also demonstrate a company’s commitment to ESG.

The spectrum of issues is broad and depends on factors such as geographic location or specific assets. The risks themselves are also dynamic and non-linear, introducing additional challenges in identifying and addressing them, unless they are viewed through an integrated sector lens.

Why has the concept of ESG come to prominence in recent years?

ESG concepts have been around for a couple of decades, but in more recent years a combination of phenomena–—increased mobility of capital, the influence of social media, significant social events, improvements in data analytics and automation and the urgency of global challenges such as the climate crisis–—have all combined to shift expectations in relation to the systematic identification, assessment and management of ESG factors.
ESG as a concept for business has taken on greater significant in the last say three to five years, in part due to heightened focus by regulators and the community as a whole on non-financial risk.

What does this mean for insurers and the expectations of investors?

There is no doubt ESG presents unique challenges for participants in the insurance sector.

For example, the Reserve Bank of Australia (RBA) says that insurers are most directly exposed to the physical impacts of climate change, fuelled by global warming. This can arise through natural disaster claims, crop insurance, and health and life insurance.

There are risks to investors in carbon-intensive industries. RBA warned that Australia’s carbon-heavy export industry would be particularly exposed to regulatory changes overseas.

As a result, regulators say that there is likely to be an increase in insurance premium due to claim change impacting the affordability and availability of insurance.

Insurers need to be in a position to identify and manage ESG risk across their portfolios. This in turn requires careful consideration of ESG risk at the insured level, for example, by supporting insureds to identify climate and other risks in their own businesses.

In the D&O insurance space, for instance, insurers are increasingly aware of ESG factors impacting Australian businesses and associated risks insured under D&O policies. Climate change is the area of greatest concern for future class actions and claims impacting D&O insurance. Two-thirds of underwriters who responded to a survey we carried out considered Australia was behind other countries in responding to ESG issues.

That being said, only 10 percent of respondents considered they were well placed to assess a company’s level of engagement with and responsiveness to ESG issues, with the majority acknowledging the level of information provided can vary significantly from company to company.

What frameworks can insurers use to integrate ESG principles? How does DLA help?

There is a range of frameworks that insurers can use to identify, assess and seek to manage ESG factors across their portfolios. For example, the recommendations of the Task Force on Climate-related Financial Disclosures are the leading framework for assessment of climate risk and opportunity, and the Task Force on Nature-related Financial Disclosures has released the beta version of its framework, focusing on biodiversity risk.

Other key frameworks include the UN Guiding Principles on Business and Human Rights, which provide a due diligence-based approach for the assessment of impacts and human rights and associated remedial measures.

DLA Piper supports clients to integrate these principles into governance, strategy, risk management and reporting frameworks, including in a manner that is consistent with emerging regulatory frameworks such as the EU’s Sustainable Finance Disclosure Regulation, as well as due diligence frameworks directed at deforestation and human rights.
Our ESG services include legal advice and consultancy services with skillsets including organisational change (for instance around D&I) and technological solutions such as asset tokenisation and blockchain, in recognition that genuine integration of ESG principles requires transformative cultural change and innovative, rigorous and verifiable applications of data.

How do certain types of policy such as parametric triggers help ESG?

Parametric insurance will play a big role going forward in helping in recovery from natural disasters. Parametric insurance is currently limited to natural disaster such as cyclones, earthquakes, lack of sunshine, excessive average rain, drought, extreme temperatures, bushfires and hail. Key advantages are that they are fast, transparent and reliable.

Through an ESG lens, as severe weather events become more frequent with climate change and increased global warming, parametric insurance will be inherently tied to disaster resilience in society. Parametric insurance will aid in recovery from the impacts of these events.

With extreme weather events causing up to 70 percent of crop loss in Australia, parametric insurance can give farmers added protection and greater confidence for their farming future.

Furthermore, data and technology are making possible additional triggers such as vegetation or biomass growth, retail foot-traffic, pandemic-related scenarios and cyber outages. The future of parametric cover could see it applied across a wide range of industries and events.

What other initiatives are you seeing in the industry around this and climate change?

The insurance sector is uniquely placed to support the world’s transition to a sustainable, low-carbon economy. The sector has already taken a lead in integrating sustainability into the business of insurance through its own activities, investee companies and policyholders.

For instance, the UN-convened Net-Zero Insurance Alliance was established last year with a group of over 20 leading insurers who have committed to transition their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas emissions by 2050. Allianz, AXA, QBE, Zurich are among the members of the Alliance.

Lloyd’s of London has started to phase out of new investments in thermal coal-fired power plants, thermal coal mines, oil sands and new Arctic energy exploration activities in 2020.

AIG has announced its commitment to achieve a net-zero future across its global underwriting or investment portfolios by 2050 by committing to taking specific actions such as no longer investing in or providing insurance for the construction of any new coal-fired power plants, thermal coal mines or oil sands. This is a major step because AIG was one of the last major insurers without restrictions on coal insurance.

Join Tricia Hobson of DLA Piper who is speaking at a special virtual webinar hosted by Intelligent Insurer titled “Embrace ESG: Discover what tools and policies are available to insurers”, which will take place at 2:00pm BST on June 13, in association with DLA Piper, and features speakers from Zurich, SiriusPoint and Steel City Re. Click here to register: