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ESG moves centre stage

Pressure to manage ESG risks (and opportunities) is growing in various quarters, from credit rating agencies and regulators to campaigners and “woke” individual consumers.

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Insurance company boardroom meetings usually involve a litany of acronyms – but the letters “ESG” seem to be on every chief executive’s lips these days.

Environmental, Social and Governance (ESG) factors have moved up the agenda because re/insurance leaders are grappling with the implications of headline issues such as climate change, gender inequality and investor activism for the sustainability of their business.

As rating agency Moody’s pointed out in a recent research note, insurers find themselves in the spotlight because they control a significant portion of global investable assets, while at the same time provide risk-transfer capabilities that are fundamental to the functioning of commerce and society.

The pressure to manage ESG risks (and opportunities) is growing in several different quarters, from credit rating agencies and regulators to campaigners and “woke” individual consumers.

“In the past ESG topics were mostly brought forward by campaigners and NGOs, frequently addressing individual companies with specific cases to do with controversial projects like dams, for example,” says Chris Bonnet, Head of ESG Business Services, the centre of competence for ESG for industrial insurance at Allianz Global Corporate & Specialty SE (AGCS).

But societal sentiment has changed considerably in the last couple of years, with ESG going mainstream, Bonnet notes.

Also, institutional investors are increasingly aware of ESG considerations and sustainability is a big topic for them. BlackRock’s recent announcement that it is putting sustainability at the centre of how it invests reverberated through boardrooms everywhere.

The non-financial rating of a company is more important than ever, says Bonnet: “Available data and reporting have improved over the past few years with the rise of rating agencies like the Dow Jones Sustainability Indices or MSCI. Then there is the growth in voluntary sustainability guidelines, which in our sector relates to the UN Principles for Sustainable Insurance (PSI). It is growing more widespread and increasingly formalised through more detailed practical guidance,” he explains. “Finally, regulators are taking more interest, including , which aims to include ESG considerations into Solvency II.”

Good business sense 

Like Allianz, the French insurance group AXA has pushed the ESG envelope. Sonia Wolsey-Cooper, Chief Corporate Responsibility Officer for AXA UK and Ireland, thinks it is a social obligation – and makes good business sense.

“We believe that everyone must take action to fight climate change, including us as a company,” she says. “As an insurer, we bear much of the financial cost of natural catastrophes, for instance when we pay out for flooded homes,” she continues. “But we also have a wealth of data and expertise that we can leverage to mitigate environmental risks. We are taking action because it is the right thing to do for our clients, for AXA, for the countries we operate in and for the planet.”

Wolsey-Cooper says climate commitments have influenced what AXA insures and how it invests. “For instance, we have strengthened our restrictions on underwriting coal. And we have launched a weather service to support communities and companies facing natural disasters such as floods, earthquakes, cyclones and wildfires.

“We are investing in transition bonds to support cleaner ways of doing business,” she adds, “and we aim to fully divest from coal by 2040. We want to contain the warming potential of our investments under 1.5°C by 2050.”

Nigel Brook, who heads the law firm Clyde & Co.’s reinsurance team and leads its global campaign on Resilience and Climate Change Risk, says that insurers’ “E” factor has come under more scrutiny in the last two to three years because of raised awareness around climate change. Campaigns like Unfriend Coal, especially, have gained widespread attention for naming and shaming insurers who continue to insure and invest in coal. Like Chris Bonnet at Allianz, Brook highlights the growing involvement of national regulators, particularly in Europe.

“In the UK, the Bank of England is forcing insurers to identify and manage climate risk. The Network for the Greening of the Financial System shows how regulators in other countries are moving in the same broad direction as the BoE,” he explains. “It also seems likely that regulators will increasingly look for adherence to TCFD standards of climate disclosure.”

TCFD was established by the Financial Stability Board (FSB) in 2015 with the goal of developing a set of voluntary climate-related financial risk disclosures that can be adopted by businesses so that those companies can inform investors and other members of the public about the risks they face related to climate change.

“There’s pressure from institutional investors for companies to do more. Insurers may well find that they experience this kind of engagement,” Brook says, citing Climate Action 100+, the investor initiative launched in 2017. More than 370 investors with over $35trn in assets collectively under management are calling on companies to curb CO2 emissions, improve governance and strengthen climate-related financial disclosures.

‘S’ and ‘G’ pressure also rises 

It’s a similar picture on the social and governance aspects of ESG, with pressure rising on different fronts, according to Clyde & Co. partner Heidi Watson who specialises in employment practices at insurance companies.

“The implementation of gender pay reporting has been a huge driver for change in the UK,” says Watson. “We advise many insurers on employment issues and pay and culture has become one of the most important, becoming a board level issue and not simply an HR topic.”

Two cycles of gender pay reporting have revealed the extent of gaps and created more pressure for change. Insurers see they need to take to the issue more seriously now, Watson thinks.

“There’s no compliance sanction but the ‘naming and shaming’ of those who do not comply with the reporting requirement means there is a lot of ‘societal’ pressure to comply,” she says. “It also has an effect on recruitment and talent retention, because staff want to see where their employer stands in terms of the gender pay gap, and its diversity and inclusion efforts more broadly.”

At the same time, the #MeToo and #TimesUp movements have thrown a spotlight on harassment in the workplace, inspiring insurers to more closely examine their culture.

As with sustainability, regulators have tightened their focus on conduct. In the UK, the FCA’s introduction of the Senior Manager and Conduct rules has created a framework to hold firms and senior managers to account on non-financial conduct.

“The regulators have made clear that conduct including bullying, harassment and discrimination can be the subject of disciplinary action, and when considering fit and proper status,” Watson warns. “The recent ‘Dear CEO’ note from the FCA emphasises its willingness to take action to look behind what drives non-financial misconduct and whether a negative culture is at the root of it.”

The FCA’s warning comes after reports last year of sexual harassment and excessive drinking in the Lloyd’s market. Lloyd’s subsequently launched a campaign to encourage more people to speak up against unacceptable behaviour as part of a programme of measures put in place to address the findings of Lloyd’s Annual Cultural Survey.

Direction from the regulator to demonstrate how important it will be for insurers to have an inclusive culture will drive genuine responses from insurers, Watson reckons.

“In my experience, insurers are already taking issues of non-financial conduct seriously,” she adds. “An increased spotlight by the regulators will perhaps push the dial on even further to look at the underlying culture and its impact on driving any misconduct. We have been doing a number of ‘culture audits’ for insurers keen to look at this issue.”

Insurers respond 

The profound change in how the financial services industry views sustainability is reflected in changes being made by insurers to their governance structure. More insurers are making appointments in the C-suite to take responsibility for ESG risk and compliance (see sidebar).

Allianz was an early adopter when it established an ESG Board and related internal governance and expert structures in 2012.

“We asked ourselves, do we want to manage opportunities or risk? On business opportunities that could mean looking at how to align with new green technology, for example, where the risk profile isn’t always known already. Risk management factors can mean, for example, modelling risk scenarios for climate change to understand our exposure or due diligence on ESG risks for certain business activities,” says Bonnet.

The ESG department at AGCS is part of the risk management framework, using due diligence tools, just as other departments do, to define what’s acceptable to insure within its ESG appetite. The insurer also has blanket exclusions relating to some risks, like controversial weapons, for example.

“In other fields, such as large infrastructure, it’s crucial to understand a company’s ESG risk profile and incentivise change through a risk dialogue if necessary before deciding to no longer provide coverage for a certain risk. More insurers are following AGCS with this approach to managing ESG risk factors,” Bonnet adds.

“It makes sense for an industry that is used to collaborating on risk. It would be odd if a certain common understanding and joint standards did not develop.”

Sustainability gains traction with U.S. carriers 

North American insurers have come under fire for doing too little on the ESG front compared with their European counterparts. But that’s changing – and several U.S.‑based carriers, including the Hartford and Chubb, have won plaudits for their “coal exit” plans, for example.

Additionally, some carriers have recently created positions to lead their ESG efforts across their organisations.

Last year, Travelers named Yafit Cohn Chief Sustainability Officer. “We’ve recently taken our sustainability efforts to the next level, including by engaging with our shareholders and other stakeholders more deeply on how, at Travelers, industry-leading results are inextricably linked with gratified customers and business partners, engaged employees and healthy communities,” Cohn says. “We have also launched our first comprehensive sustainability website , which takes an integrated approach to disclosure and conveys how Travelers creates value in the broadest sense.”

Cohn says that Travelers was seeing more questions from investors relating to environmental and social initiatives, largely because an increasing number of investors are signatories to the UN Principles for Responsible Investment (PRI) or are voluntarily committing to incorporate ESG factors into their investment processes.

“In addition, many rating firms are grading companies on ESG disclosure and/or performance, and we were receiving numerous survey and data verification requests from such firms each year. The sustainability site we launched last year enables us to communicate effectively with our investors about our holistic long-term value creation strategy and enables data providers to gather accurate information about our company for use in their reports,” said Cohn.

Another carrier, Liberty Mutual, named its first Chief Sustainability Officer last December, and announced it will start limiting its underwriting and investment exposure to thermal coal. As CSO, Francis Hyatt will head the company’s ESG initiatives across the global enterprise.

“Now more than ever it’s crucial that companies across industries take an active role in advancing their ESG agendas. We’ve always been and will continue to be committed to being a responsible global citizen, to maintaining financial strength in order to fulfill our promises, to making decisions that drive a positive impact and to upholding the highest standards in corporate governance,” Hyatt said in a statement to Reactions.

“There are a variety of key ESG-related topics that are important to consider, including risk management, underwriting products and innovation, investments, philanthropy, employee well-being, and ethics and compliance, among others,” Hyatt added. “ESG continues to evolve for our industry and is an area that will gain increasing significance in the years to come.”

This story was originally published in Reactions.