With governments and citizen activists demanding advancements in sustainable business, ESG initiatives are moving to the forefront of today’s market economy. In this environment, it is crucial for financial institutions to effectively manage ESG-related risks and capture ESG-centric opportunities as we see numerous examples in various domains of the financial services and insurance industries.
The insurance industry is exposed to sustainability issues, including through policymaker and regulator focus on long-term investors and major asset owners. Given that insurers control around $30 trillion in assets globally, with a significant sum held for decades, it follows that ESG regulations should affect the insurance industry more than most. This regulatory push is expanding globally; not only are insurers exposed to actual ESG risks via their underwriting and investment activities, but to specific new regulatory risks as well, including social and environmental accountability.
In 2020, natural disasters – excluding COVID-19 – caused a total of $76 billion in insured losses just in the United States, as opposed to the $7 billion in man-made insured losses. This marks the fifth most expensive year since 1970, and includes damage from storms, polar vortexes, and wildfires. With these numbers come unprecedentedly high pay-outs for insurers, who paid $31 billion each year on average in the 2010s as opposed to $19 billion the decade before. As these trends are likely to worsen over the coming years, it is time for insurers to re-evaluate their understanding of risk in the 21st century.
As ESG investing continues to gain momentum, it is imperative for insurers who want to reduce portfolio risks and generate returns to pay attention to ESG criteria. Firms that fail to manage ESG-related risks may face consequences from their shareholders, who have an increased awareness of ESG and demand accountability from their insurance investee companies.
As investors and regulatory bodies become more attuned to ESG concerns, the financial services industry is now seeing capital allocated based on ESG information and ratings. ESG is becoming the “industry standard” as consumers gravitate towards brands that address ESG issues in ways that align with their own values. As ESG reporting continues to evolve, firms that innovate more quickly will race ahead.
Recommendations for financial organizations to advance the ESG agenda and stay ahead of the competition:
- Ensure the firm is prepared to manage all aspects of the ESG challenge and has a strategic approach to Green, Social and Sustainability to promote ESG benefits to their investors
- Align to an ESG ratings provider or an ESG data aggregator organization so that the company’s ESG performance can be measured and tracked relative to other firms
- Consider the attributes of ESG data, which are hard to track and still evolving, in your company's data management standards and methods, especially when supplemented by third party data
- Create transparency for improved ESG data management; encourage the better use of ESG global data assets for sustainability which in turn will lead to better financial and societal outcomes
- Create education programs to inform their stakeholders internally and externally about ESG and how it is going to impact “Business as Usual”
- Re-think how risk exposure to various coverages is assessed, particularly in areas of General and Product Liability, Directors & Officers liability, etc.
- Strive to eliminate adverse exposure based on how coverage is applied, in case policy holders/companies are not adhering or meeting ESG standards and consequently fines/penalties are incurred, leading to additional cost the Insurance company must pay