Why is ESG is no longer an aspiration—it is now critical for insurers

Two recent reports highlight the difficulties the industry must contend with when it comes to environmental, social and corporate governance (ESG) issues. In late May, London-based campaign group ShareAction released its report accusing insurers of “driving climate change, biodiversity loss and human rights violations”. The group said insurers were lagging behind the finance sector’s push to embrace ESG issues.

In the same month, a survey by Aberdeen Standard Investments found 87 percent of UK insurers believed that risk management was the primary driver of their ESG practices. Only 27 percent saw ESG as a business or investment opportunity. For many, it seems, ESG has little upside.

To discuss the challenges facing the industry, a recent session of  Intelligent Insurer’s Re/insurance Lounge, the online, on-demand platform for interviews and panel discussions, brought together a diverse panel of experts:

Theory into practice
No-one on the panel doubted the rising importance of ESG. As Dugan said, addressing ESG has become a fundamental requirement—“table stakes”—to operating in the industry.

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“Over the last few years, we’ve all experienced the significant shocks in volatility created by more frequent catastrophic events and other effects of climate change. Our investors and regulators worldwide have taken notice and are demanding action.

“Incorporating ESG into underwriting and risk management is no longer aspirational or even optional,” she explained.

Botelho-Young agreed. Her agency started including ESG commentary in its ratings explicitly in 2018, and it now forms a vital part of all its discussions with companies. “There’s not a management meeting with our rated companies where we don’t talk about the subject. It is on the agenda and on everyone’s radar,” she said.

Agreeing on its importance is one thing—addressing it is another. In developing an ESG policy, insurers face two challenges. The first is that strategies will vary massively across businesses. As Botelho-Young pointed out, the ESG issues for insurers heavily exposed to natural catastrophes differ considerably from those of a monoline underwriter.

As Bruch put it: “It’s important to define your own strategy. What’s the relevance of the ESG topic in your core business?”

That means examining each component—environmental, social and corporate governance—and their relevance to the businesses.

“An insurer can’t necessarily save the polar bears on the melting ice cap, but they can think about their value chain, their products and services,” said Korwin-Szymanowska. This work of “translating” ESG concerns into practical policies is the key when designing a strategy, she added.

Bringing it together
The second key challenge insurers face is applying ESG considerations to the different aspects of their business and the range of risks. Most obviously, insurers are not just underwriters but investors.

“Insurers have a unique role as risk carriers and institutional investors, so understanding the potential impact on the underwriting side and the asset side is very important,” explained Botelho-Young.

On both, ESG issues bring the risk of financial losses—either from exposure to claims and accumulations, or from falling asset prices, as economies transition away from carbon, for example. Both sides also carry reputational risks.

As investors, there is—as the Aberdeen report showed—increasing pressure on insurers to follow pension funds in pursuing sustainable investment policies. This, however, may serve only to highlight the lack of action on underwriting, about which ShareAction’s report complained.

As Botelho-Young explained: “It becomes difficult because if you’ve stopped investing in coal, for example, you still run the reputational risk if you are still underwriting coal companies. You can be called out by activists if you’re not aligned.”

Insurers must first recognise this part they play in the “social contract”, as Korwin-Szymanowska describes it, and acknowledge that they must decide whether or not to give industries “the right to operate” by providing risk transfer solutions.

“It’s a key role and question the insurance sector is faced with,” she added.

Insurers must also figure out how to integrate it and all the factors and risks—underwriting, investment and reputational—in a coherent strategy for their businesses. Only then will they be able not only to manage the risks the increased focus on ESG brings but also to potentially see the benefits.

As Bruch said: “You need to define your governance structure, define the right rules and guidelines and integrate those topics into your process. Then you can see what kind of business opportunities you can leverage from those new elements.”

To view the full Re/insurance Lounge session click here.