Earlier this year a Bloomberg forecast found that environmental, social and governance (ESG) based assets could exceed US$53 trillion by 2025, representing more than a third of total assets under management. It’s a powerful indication of the growing role ESG is playing from an investment perspective and a reminder for many organisations that investors will be looking more closely at ESG performance as a reason to invest. But investment is not the only reason to brush up on an organisation’s ESG credentials; the ability to access the insurance markets is also increasingly reliant on ESG performance.
Investment with an ESG focus
ESG covers a complex landscape; Environmental considerations cover a company’s performance in areas such as pollution, climate change, and waste; Social covers impact on staff and society including diversity, equality and stakeholder impacts; which is underpinned by good Governance, culture, conduct, integrity, regulation and resilience. In many ways ESG is a combination of previous initiatives seen in the past such as Corporate Social Responsibility, sustainability and triple line reporting, but the sum of all these parts has risen in prominence in recent years. And, from an investment perspective, while investors used to make decisions based on a firm’s tangible assets, ESG is a new lens through which many now see investments with far more focus on ESG related intangible assets.
Measuring performance
As this emphasis grows, almost all businesses are faced with the challenge of both managing and measuring their ESG performance. There are many standards for ESG metrics, with many investment organisations having their own criteria to suit specific agendas. In practice many organisations present their ESG metrics aligned to a known framework such as the UN Sustainable Development Goals, or those developed by ratings agencies.
It is important to note that there is a growing interest in the bigger ESG footprint, with increased scrutiny on an organisation’s value chain, to take into account what activities it might be enabling within both its supplier base and customer base. An individual organisation may have a proactive ESG approach but if suppliers or customers do not, then that will reflect on the organisation. As an example of this concept of enabling, an airport may be able to attain net carbon neutral operations within its perimeter but would still be effectively enabling carbon-heavy flights and ground based onwards transportation.
Insurers aligning with positive ESG outcomes
Aside from investment, building transparency around ESG performance is also becoming an important factor when it comes to securing business insurance. Insurers are increasingly interested in aligning their business with positive ESG outcomes which means it can be more difficult to secure cover in carbon intensive industry sectors such as oil and gas, and coal mining. Lloyd’s recent ESG report, for example, is explicit that it doesn’t want the market to be in tar sands or Arctic exploration.
Effectively there are insurers who are ‘active adopters’ when it comes to ESG which means they’re heavily reducing capacity to those industries and with poor ESG performance. The sharp end of this is being felt in the oil and gas sectors and other carbon intensive industries. Down the scale there are those carriers who are more about ‘considered coverage’ and are showing interest in what their clients are doing from an ESG perspective, but are still offering cover if those organisations can show an improving approach to ESG; although pinch points exist when it comes to industries like tobacco, gambling, and weapons manufacturers. Finally, there are the ‘slower movers’ amongst insurance carriers where ESG performance isn’t yet a material influence on cover.
Insurance renewals demands ESG transparency
How then does that impact a company’s annual insurance renewal programme? The hardening market has put more emphasis on clear information disclosure and ESG adds to the number of data points to be collected. It should be remembered that investors also use information gathered via automated data scraping technology which means any information published by an organisation on the internet needs to be clear, unambiguous and in a machine-readable format.
Having clear ESG related targets, measurable metrics and a purpose and timeline for future performance is critical, but there is also a lot of insurer focus on the transition risk as organisations move towards a carbon neutral future. Being able to show a plan for improvement will help facilitate continued partnership with carriers and, as with cyber risk, it’s important to build time to consider ESG into renewal schedules.
Unmet needs
Aside from renewing their existing programmes, businesses might equally ask what the insurance markets are doing to help them mitigate and manage the new risks that ESG presents. There are some areas where traditional coverage addresses ESG ‘event based’ incidents like pollution, public and product liability, directors’ and officers’, and health insurance. But many of the ‘trend-based’ risks that are emerging within ESG are areas where the industry needs to become more creative about solutions to satisfy unmet needs and plug a growing protection gap with risks like climate change, community impacts, and business transparency and resilience.
Companies need to do their bit to showcase their burgeoning ESG credentials to secure both future investment in their businesses as well as competitive risk transfer options on their traditional risks, but they’ll also be expecting the insurance industry to innovate to help them transfer new risks emerging from ESG factors.