COMMENT: What does ESG really mean for firms?
ESG presents an opportunity for insurers to combat underwriting and operational risks, re-evaluate their role in society, and embrace innovation, says Christine Korwin-Szymanowska
Implementing an environmental, social and governance (ESG) strategy provides a framework for insurers to think about their impact and dependencies on the environment and society, and to assess the quality of their corporate governance.
While ESG has roots as far back as the 1960s, it has become increasingly prominent in the last 18-24 months, due to factors such as climate change, increasing social inequality, and the COVID-19 pandemic.
This is combined with the rise in social media use and global connectivity, supporting greater public engagement on ESG issues and the growing number of stakeholders putting pressure on insurers.
It is thus becoming increasingly important for insurers to assess their own ESG ambitions, and take appropriate action.
ESG highlights the increasing risks that insurers face, both in their own activities and through underwriting the activities of other corporates.
Increasing climate risks, for example, expose insurers to larger, more frequent losses (eg, from more frequent extreme weather events). Insurers are facing greater difficulty in accurately underwriting certain classes, which is reflected in increasing coverage prices.
Likewise, insurers will see changing business dynamics through the next few years from transition risks, often associated with regulatory changes.
On the other hand, ESG presents an opportunity for insurers to combat these risks, re-evaluate their role in society, and embrace innovation.
Insurers, for example, can reassess the sectors they choose to underwrite, moving away from high-emission companies or sectors with higher risks for modern slavery.
Likewise, there is potential to protect more vulnerable populations by creating products (eg life protection) that can protect minority groups and improve social inclusion.
Product innovation can stretch across each aspect of ESG. Alongside protections for vulnerable groups, insurers can look to create green and socially responsible products. These could include energy efficient insurance, property coverage for social enterprises, specialty insurance for electric and micro mobility vehicles, and beyond.
Despite challenges, ESG thus presents significant opportunities for those in the insurance sector that choose to take action.
Insurers can best approach ESG by breaking down each element of ‘Environment’, ‘Social’, and ‘Governance’ into manageable sub-categories. These include aspects of the insurers' offering, such as products and services, or elements of the value-chain, such as the supply chain and distribution.
Companies should determine their ambition against each sub-category, keeping in mind their overall ESG ambition and the expectations of stakeholders. This allows insurers to understand which areas they want to focus on and which areas will simply follow the minimum regulatory requirements.
To take action on their ambitions, insurers should look to generate and implement practical initiatives, aligned to their strategic goals. Initiatives can be assigned to each ESG element and sub-category, and prioritised to create a coherent response.
Prioritisation can focus on initiatives which have the greatest ESG impact, while offering higher ease of implementation. Insurers may also consider factors such as feasibility of innovation or expected return on investment.
Successful implementation of the prioritised initiatives will rely on execution supported by robust ownership of each initiative and governance that is tied to ESG values.
To read the full report on ESG and Insurance, click here