ESG – The Insurance Industry’s Pivotal Moment

Una McGuinness our consultant managing the role
Posting date: 09 April 2021

There is no greater long-term threat than climate change in today’s world. Tackling ESG issues has become a matter of urgency, so it’s no surprise that many companies are pushing toward sustainability. As regulation ramps up, insurance is now playing catch up with other areas of financial services that are far more advanced. According to CNBC, ESG investments will be a pivotal focus throughout 2021. EY Sustainable Finance Index states that “UK insurers lag Western European peers on incorporating key environment factors into their operations.”

The insurance sector remains one of society’s key risk bearers, which means the industry is in a prime position to act and drive true sustainability globally. DE&I has been a key focus as well, accelerated even more so, by COVID-19. ESG is now a real Board agenda in 2021, with companies facing increasing pressure around ESG and Sustainability and the need to be genuinely engaged. Climate-related financial risks present an unprecedented challenge and are a focus of central banks globally. The PRA expects firms to have fully embedded their approach to managing climate-related financial risk by the end of this year, both from a client perspective and internally.  This has been on the agenda since April 2019 when the PRA published "Supervisory Statement 3/19". Insurers are in a prime position, with huge potential to drive this change agenda through their clients’ operations whilst also implementing change internally to create a corporate vision. Sustainability underpinned by good governance, risk management, and sound scenario analysis and disclosure needs to be at the heart of this vision.

Gone is the Time for Tokenism

With ESG issues becoming increasingly scrutinised, it is even more important that insurers address sustainability concerns to contribute to the global environment, as well as to support and develop their own corporate brand and reputation. Taking a robust approach to ESG & Sustainability is a business imperative. Firms must avoid the seven sins which can lead to poor ESG practices, missed opportunities and at worst, a downgraded credit rating. Regulators and Rating Agencies are now seriously considering firms’ approach to ESG & Sustainability. AM Best set out its Credit Rating Methodology (BCRM) in November 2020. Companies must ensure that sustainability is embedded into their culture. DE&I and ESG are no longer a series of boxes that businesses can be ticked. Gone is the time for tokenism.

Successfully creating a culture of sustainability depends on corporate initiatives, social responsibility, ethical behaviours, inclusive cultures, and transparent governance – all of which must be actionable and purpose-led. Sustainability and ESG strategies now influence customer decision-making and talent attraction. There is also increasing evidence that a robust DE&I and ESG strategy can elevate profits and increase customer interaction, as well as talent attraction and retention. For example, McKinsey reported that ESG factors can affect profits by up to 60 per cent, which shows just how important ESG is in creating further value. With ESG & Sustainability issues, and expectations now at the forefront of regulators and customers’ minds, insurers will need to comply or risk damaging their reputations as well as growth.

Evolving, not just Complying

Insurance companies are now more aware of ESG & Sustainability, with many actively adapting their models to comply with regulations. For example, global asset company Natixis Investment Managers conducted a survey where it was found that more than two-thirds of insurers consider climate change a core business issue. Parallels can be drawn from previous shifts in regulation and forced operational change and reporting from the heightened focus on ERM and the development of ORSAs. Several insurers have made net-zero emissions commitments addressing the “E”, whilst possibly missing or side-lining the “S”.  Climate change is a major risk to insurers, not just from an investment perspective but how they operate, whom they insure and how. Many companies are changing their policies and assessing ESG risk appetites that affect the environment to not only comply with regulations but also to effect change in business practices. One such example, the US insurance investment company The Hertford announced that it would be removing its policies and investments related to oil and coal.

We have heard numerous announcements from Lloyd’s and insurers alike about a reduction in coverage across coal-fired plants to new Artic energy exploration. Yet, the question has been asked as to whether insurance operations are truly capable of capturing the data, drilling down into their books and understanding the wider hidden risks of their clients. It is now even more important that insurance companies adapt, change and genuinely understand what their own risks truly are whilst supporting their clients towards ESG and climate resilience. Utilising the right technologies to fully understand their ESG related exposures will be essential and key. Challenging ingrained thinking or pre-conceived biases and looking at the broader picture to allow the attraction of a new generation of talent will be pivotal to insurers’ long-term success or failure.

Responsibility to Commit to ESG

There are a variety of actions that insurers can take to fully commit to ESG. Over 140 organisations globally are using the first global ESG guide to manage risks in assessment and support their broader approach to ESG. Following an initial risk assessment, insurance companies need to develop an ESG approach to detect and analyse real internal and external risks. This means it is even more important for insurers to fully adopt digital into their underwriting process, making it easier to obtain information, to help identify risks that are not initially apparent. Insurers will also need to publicly report on their ESG risk assessment transparently with regulators and stakeholders as they do with DE&I. Whether it is developing an ESG governance policy framework from scratch or integrating ESG principles across their existing platform, sustainability and DE&I is a priority and is here to stay.

Boards of insurance companies have a huge responsibility to commit to ESG, as they have with culture, to make it central to an organisation’s operations, particularly as much of today’s top talent wants to work for sustainable and ethical companies. The insurance industry has an instrumental impact on economic, social, and environmental sustainability – so now’s the time to make strategic decisions for the benefit of all society.

How can Hanover support your Business?

Hanover has a deep understanding of the key, critical business issues being faced by our clients across ESG and DE&I which paves the way for real, systemic change. Hanover has an outstanding track record of providing innovative solutions. We consult with firms going through a cultural shift and are able to swiftly source diverse talent, in all its forms, for the insurance industry and wider financial services market. We have access to broad talent pools outside the industry and keep up to date with market trends. Our dedicated consultants offer a range of services which include executive search as well as leadership solutions and market intelligence, helping to strengthen your company’s talent base by hiring only the best people for you. Contact Hanover Partner, Zoe Campbell for more information on the insurance industry, she brings with her over 18 years of experience. Alternatively, get in touch with our wider team if you would like to discuss your DE&I, Talent or ESG strategy.

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