Articles - How insurers can enjoy the upside of the ESG agenda

Karen Grote and David Singh look at what insurers need to do in response to the risks and opportunities linked to the rapid pace at which ESG and climate regulation are evolving. According to the Energy and Climate Intelligence Unit Net Zero Tracker, 54% of global emissions were covered by net zero commitments by July 2021. The push to achieve net zero emissions, and the economic and social transition that will be necessary to do so means that value, financial and client worth, in their widest sense, are being re-evaluated.

 By Karen Grote, Senior Director, Insurance Consulting and Technology, WTW and David Singh, Head of Climate Analytics and Exposure Management, Insurance Consulting and Technology, WTW.

 A notable feature of COP26 in Glasgow in 2021 was the heightened participation and interest of the finance sector in driving net zero ambitions and targets. Large scale investors are becoming fully attuned to assessing climate-based risks and returns. And from an insurance perspective, the “E” focus, predominantly arising from the frequency and increased severity of natural catastrophe events, has heaped further pressure on the need to try and bridge the protection gap with company values and sustainability in mind.

 Regulators are another reason. Regulators around the world have the bit between their teeth on ESG issues. It’s the sign of the times, and more so than ever, as more regulatory bodies are pushing the ESG agenda by making reporting based on the Taskforce for Climate-related Financial Disclosures (TCFD) framework mandatory. Indeed, the pace at which ESG and climate regulation is changing, and new initiatives and reporting requirements are being brought to the board room table, can be perplexing to navigate.

 Managing ESG with a broad church of just about everyone that an insurer interacts with also requires meticulous expectation management; from shareholders who want to see evidence of ESG plans and actions, to employees that want to work for a ‘responsible’ employer, and to the public at large who are basing buying decisions on a changing value scale. Current and future clients are increasingly considering the actions and reputation of companies in their decision making and perceptions.

 Avoid being sidelined
 The implications for insurers are broad and deep. Here are four broad tips we believe will help insurers advance their ESG agenda and capture the opportunities that will stem from the transition to net zero, and avoid being left on the sidelines to take the full brunt of the risks:
 1. Let regulation be your guide, not your master - Regulation and reporting requirements are a significant factor in the changing ESG landscape and insurers may understandably need guidance to work out what can be a picture of many parts. But these should not be the driver of a company’s ESG approach. Because ESG regulation is relatively new - even in the most developed markets - it is also being influenced by many initiatives already underway. So, there is potential to help shape the future regulatory landscape.

 2. Look at Climate as a risk issue - Metrics such as carbon pricing and carbon offsetting don’t exactly equate to the financial impact of climate transition. The key to augmenting such metrics and thinking about the risks and opportunities of economic and social transition is the impact on demand, prices, value and future cash flows. Furthermore, when looking at investments and asset strategies, companies with high investor ESG scores can still be exposed to climate transition risk.

 3. Pick ESG metrics with care and with an eye on the longer term - Many insurers, particularly those with greater exposure to natural catastrophe events, have sophisticated modelling approaches in place for physical climate risks. Nonetheless, the wider remit of ESG effects and the limited extent to which many existing models consider future transition scenarios means that insurers face challenges on some of the assumptions and their application.

 Best practice in ESG metrics will involve not only considering what’s important from a top down and bottom-up exposure management perspective but thinking through the information that can be used to add context and texture to transition scenarios.

 4. Opportunities are as important as risks - The greater focus on ESG issues carries real opportunities for insurers – in terms of investment strategy, underwriting strategy, product development, employee perceptions, reputation and more. The ability to fully capture those opportunities will stem from an open, collaborative and inclusive ESG strategy framework that employees welcome and feel part of.

 Our experience shows that knee jerk reactions are just not pragmatic, or a realistic response to the growing need to demonstrate progress to a wide variety of stakeholders, such as the effects of a change in underwriting strategy on claims reserving.
 Instead, building these points into a multi-year roadmap that considers the implications from within the business has to be an iterative process. For insurers, who are increasingly being thrust to the centre of climate and ESG discussions because of their role in both providing risk capital and as major investors, the window for sitting back and seeing what others are doing is starting to close.

 Energy and Climate Intelligence Unit Net Zero Tracker

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