Environmental, Social, and Governance Factors – a Rapidly Evolving Landscape
While the investment community has considered environmental, social, and governance (ESG) factors for some time now, an increasing focus from insurers on ESG is changing the insurance landscape rapidly. As a result, companies operating in or adjacent to carbon-heavy industries face a challenging insurance market for obtaining cost efficient and sustainable insurance.
UN Environment’s Principles for Sustainable Insurance Initiative
In June 2020, we saw the release of the first ESG guide for the global insurance industry developed by the United Nations (UN) Environment Programme’s Principles for Sustainable Insurance Initiative, “Managing environmental, social and governance risks in non-life insurance business.” [PDF]
The Sustainable Insurance Initiative is based on four key principles:
- Embedding environmental, social, and governance issues in decision-making.
- Working with clients and business partners to raise awareness of environmental, social, and governance issues, manage risk, and develop solutions.
- Working with governments, regulators, and other key stakeholders to promote widespread action across society on environmental, social, and governance issues.
- Demonstrating accountability and transparency in regularly disclosing publicly progress in implementing the Principles.
The intent of these principles is to provide a common aspiration and global framework for the insurance industry to manage ESG issues in respect to risk assessment and insurance underwriting.
While not intended as a formal standard, the guide is intended to be a tool for underwriters to consider ESG in the context of their business model, specific lines of business, size and geographical scope.
The guide covers the following eight areas for underwriters to consider:
- Developing an ESG approach
- Establishing an ESG risk appetite
- Integrating ESG issues into the organisation
- Establishing roles and responsibilities for ESG issues
- Escalating ESG risks to decision-makers
- Defecting and analysing ESG risks
- Decision-making on ESG risks
It will be interesting to see if this brings alignment or consistency in approach to ESG factors considered in underwriting, rather than the varied, ad hoc approach we have seen from insurers to date.
ESG Factors to Address
While some insurers have issued public statements regarding their position on certain industry segments, many others take a more selective, case-by-case approach when reviewing the businesses they will continue to insure. Given the changing market, insureds should proactively include their response to ESG issues as part of their underwriting submission. Such actions may include:
How to Communicate Your ESG Approach to Insurers
- Take a proactive rather than reactive approach to providing relevant ESG information as part of your underwriting submission, market presentations, and general engagement with insurers.
- Where possible, highlight diversification of your business model or implemented or planned measures that demonstrate a commitment to transitioning to a low carbon economy.
- Demonstrate a commitment, backed up by targets (time bound and verifiable) where possible, to reducing your own greenhouse gas emissions as well as those in your supply chain.
- Do not ignore the social and governance factors. As appropriate, highlight positives such as commitment to health and safety, zero tolerance for unethical practices or corruption in your business activities, and diversity on your board and senior management.