Why sustainability and ESG are key insurance business issues

In the insurance industry, and in the wider financial and business communities, the concept of sustainability is evolving. Now insurers are looking at it not just from the perspective of how environmental, social and corporate governance (ESG) issues impact insurance and investment portfolios, but also how insurance and investment portfolios impact the environment and society.

This is according to Butch Bacani, programme leader for the UN Environment Programme’s Principles for Sustainable Insurance Initiative, speaking in the webinar launch of a new report from law firm DLA Piper that addresses sustainability and ESG issues in the insurance sector.

The report, titled “Addressing the Sustainability Imperative”, outlines major global initiatives and frameworks, providing decision-makers, in-house counsel, sustainability officers and anyone else dealing with sustainability issues in the insurance sector with an overview of current developments along with support in developing their sustainability strategies.

Discussing the importance of such strategies, Bucani highlighted that climate change can affect access to affordable insurance, but it also presents an opportunity for insurers to invest in companies and technologies that will help tackle the issue—and the insurers that do so will have an advantage.

“There is the possibility that if you are heavily invested in high carbon assets, those assets may get stranded and lose value as we transition to a net zero emissions economy,” he added.

Bucani highlighted the potential for climate-related litigation risks similar to the problems the industry experienced in association with asbestos.

“For an insurance company, this may manifest particularly for insurers writing directors and officers liability insurance, or professional indemnity insurance,” he said.

“This is an important agenda to be looked at, given the history with legacy issues such as asbestos.”

Asked how issues connected with sustainability and ESG are being addressed in board rooms at present, panellist Graham Handy, a managing director of FTI Consulting, Global Insurance Services and leader of the risk and actuarial teams for EMEA, noted that while the coronavirus pandemic has led to many issues being de-prioritised for the time being, sustainability and ESG remain high on insurance company boards’ agendas. In fact, the experience of COVID-19 has served to emphasise the potential disruption to lives and livelihoods that could result from climate change.

“We don’t want to be on the wrong side of history when it comes to climate change and broader ESG issues,” Handy warned.

On the difficulties in complying with the multitude of emerging ESG standards and different frameworks, Tim Grafton, chief executive of the Insurance Council of New Zealand and executive member of the Global Federation of Insurance Associations, said: “It’s impossible to see the wood from the trees, but I do think that there is a path through the undergrowth. It’s true that there are different sustainability frameworks, but they generally share the same aim.

“To be sustainable is to meet our needs without compromising the ability of others, including future generations, to meet theirs. And no matter what framework you adopt, or how you propose to go forward, if you keep that as your lodestone, that will lead you through the so-called jungle.”

Grafton added that if one considers the impacts of climate change, this provides insights to many interconnected issues that are part of that jungle—for instance the environment, biodiversity, food crops, physical assets, human health, the economy, social issues, employment, wealth and inequality.

“All of those issues aggregate into a multitude of risks that we as insurers have to have line of sight on,” he said.

Grafton has been involved in the development of the sustainable finance roadmap for New Zealand, a project led by The Aotearoa Circle—a partnership of public and private sector leaders dedicated to pursuing sustainable prosperity and reversing the decline of New Zealand’s natural resources. The roadmap working group examined how social and environmental factors could be injected into capital flows such as investment and risk transfer, as a means of promoting economic growth and the long-term stability of the financial system.

This led to a host of recommendations covering areas such as raising capability in sustainable finance through education and training, improving governance and accountability for sustainability, improving data and information quality, and improving reporting and disclosure.

“Having established the roadmap, which was launched last week, we are only at ‘the end of the beginning’,” Grafton said. “The bigger task ahead is sustainable implementation, and one initiative to achieve that is the establishment of a centre for sustainable finance to oversee and coordinate implementation.

“How successful New Zealand will be remains to be seen, but one thing for sure is that success will require leadership. And in my experience of politics, it is often easier for governments to move where the private sector has already taken a lead.

“Remember, the life of a government may be only three or four or even five years depending on which country you happen to be living in, but financial institutions must take a much longer view to be sustainable.”

The role of lawyers

As to the role lawyers can play in the journey to sustainability, Natasha Luther-Jones, partner, global co-chair of energy and natural resources international co-head, sustainability and ESG for DLA Piper, said that lawyers are well placed to assist with analysing, interpreting, reporting, disclosing in relation to the myriad of standards and frameworks, and to advise on sustainability issues in relation to transactions.

In the renewable energy sector, for example, DLA Piper has developed a data-driven tool for ESG due diligence related to investment in renewable energy companies. More broadly, it requires its lawyers to look at transactions through the lens of sustainability.

“Lawyers are very used to working across different business functions, so we can work very closely with in-house lawyers to help identify the different needs within the business, and then implement solutions,” Luther-Jones added.

Other areas in which lawyers can assist relate to litigation around climate change and, increasingly, around the social and corporate governance aspects of ESG. She also highlighted the necessity of looking after staff; for instance, lawyers can assist in-house counsel when it comes to creating an effective grievance mechanism.

She emphasised the importance of engaging law firms that themselves are effectively addressing sustainability issues.

“If you’re engaging with a law firm that hasn’t addressed and reduced its carbon emissions, those are your emissions,” she said.

Handy added that in order to fully address sustainability, insurers need to look at all their stakeholders. “Generally, the stakeholder that comes to the mind of a board member has been the shareholder—whereas now it’s crystal clear now that the stakeholders are a combination of shareholders, the regulator, the customer, your distributors, your suppliers, and the media,” he said.

“There’s a very complex stakeholder community and they don’t all have the same agenda. The most important thing is for an insurer to understand what its different stakeholders require over the next year, the next three years, the next 10 years—and that will inform whatever activity goes under way.”

Looking to the future, Luther-Jones warned that if businesses sit and wait for governments and regulators to change the law, they will miss the urgency of dealing with these global systemic ESG risks, and they will also miss out on the benefits of integrating ESG and being sustainable businesses.

“I don’t think in 10 years’ time we’ll be talking about whether a business is sustainable,” she said. “If it’s sustainable, it will be in existence in 10 years. If it’s not sustainable, it will be gone.”