A roadmap to the daunting world of ESG

European re/insurers are leading the pack on environmental, social and corporate governance (ESG) factors. The US remains a few steps behind, but for those just beginning their ESG journey, how do you start off on the right foot?

Those were the main themes of a panel discussion held on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are held live on a weekly basis and content is available on demand at any time to members.

During the session, called ‘Respond to pressure from stakeholders for environmental, social and corporate governance’, industry veterans discussed the different approaches companies are taking to ESG, as they come under increasing pressure from all angles.

“You can’t go a day without something ESG-related appearing in the press, it’s in the forefront of people’s minds. There’s been a significant shift over the last three or four years from re/insurance companies in relation to ESG,” said Mahesh Mistry, senior director, analytics, AM Best.

Mistry attributes this partly to the Paris Agreement—which governments across the globe signed in 2016 to limit global temperature rises to between 1.5 and 2 degrees Celsius. Major insurance companies soon followed suit, making commitments on the climate change and sustainability fronts.

Mistry and Joseph Pursley, director–insurance at Allianz Global Investors, both agree that the US is further behind than Europe in terms of engagement, although it is gaining traction.

“Socially, people care more now. In any organisation, you have employees who care about these things.

“That kind of bottom-up pressure, along with the top-down pressure that we’re seeing from the Paris Agreement and the fact that some global leaders are saying this is a serious component for us, wasn’t the case several years ago,” said Pursley.

He added: “For insurance companies, ESG touches every component of the business—it’s the overall corporate entity, it’s the asset side on the balance sheet, it’s the underwriting side.

“You need to be telling a similar story across those three things if you want to communicate what you’re doing externally.”

But, once you integrate ESG, there’s a hugely positive reputational boost—something that Allianz has experienced.

“It’s not just avoiding negative outcomes. As that becomes more prevalent, it’s a lot easier to keep a rolling wheel moving and that’s where we are now,” said Pursley.

Daunting tasks
For any ESG mandate to work effectively, it needs to have company and board buy-in with a clear strategy, according to both executives.

“A few years ago, there was a lot more focus on the investment side. Companies are now branching out and saying ‘how is it going to impact our underwriting policy?’,” explained Mistry, adding that there’s been movement into the environmental space with green bonds.

Meanwhile, companies are now looking at what they can do in terms of putting ESG into their investment policy.

AM Best is seeing companies de-risk from industries such as coal—according to “Insuring Coal No More: The 2019 Scorecard on Insurance, Coal and Climate Change”, a report published in December 2019 by the global coalition Unfriend Coal, insurers have divested around $8.9 trillion of investment from coal. This represents 37 percent of the industry's global assets.

For companies early in the ESG-process, it’s important to get two things right, according to Pursley’s roadmap. The first is to have a governance structure, with senior leadership buy-in.

Second, to maximise the work being put into these efforts, you have to find a way to tell your employees, shareholders, and rating agencies about it.

“There’s no absolute target people are trying for or required to hit. You can decide how invasive you want ESG to be to the underwriting side of your balance sheet and to the asset side.

“Don’t think about the Paris Agreement on day one—it’s a daunting task. Think about what small things you can do early on to start the process,” advised Pursley.

It’s not the type of thing you can do in a six-month period. The Allianz executive suggested that companies investigate how ESG-friendly what you own currently is and find out from a risk standpoint if you have problem areas.

“From there, we suggest you pick a few sectors and think about how you can improve the relevant ESG component of your portfolio,” he added.

Regulatory review
Across the pond, the European regulators have been quite active on ESG. In early October, the European Insurance and Occupational Pensions Authority (the EU’s insurance watchdog) published a consultation on climate risk scenarios in insurers’ Own Risk and Solvency Assessments.

“I get the impression there will be some further changes down the road. If companies do not start to adopt any strategies themselves on this, their arm will be partially twisted by the regulators in that direction,” explained Mistry.

Pursley added: “From an insurance standpoint, people are hoping it’s a very long time before there’s a regulatory requirement. But we do need to get some consistency on the disclosure and reporting side.”

With generally accepted ESG reporting principles in place, we might start to see the direction forward more clearly, he added.

But, whatever the ESG strategy, it’s clear that companies are facing pressure from all sides. Standing still is no longer an option.

To watch the full video interview on which this write-up is based, click here and visit Intelligent Insurer’s Re/insurance Lounge