Environmental, social and governance (ESG) performance is taking on growing significance with risk transfer markets as insurers are increasingly interested in aligning their books of business with positive ESG outcomes.
Risk buyers must be aware of the significance this brings to their risk management strategy, especially as underwriters want to know how companies are managing ESG risk and opportunities.
ESG criteria casts a wide net. It can be considered as a combination of other previous initiatives, such as corporate social responsibility and environmental sustainability. However, each of ESG’s parts has distinctly risen in importance in the past few years:
- Environmental considerations cover a company’s performance in areas such as pollution, climate change and waste
- Social covers impacts on staff and society including employee wellness and diversity, equality and stakeholder impacts
- Governance focuses on culture, conduct, integrity, regulation and resilience
ESG as Part of the Risk Selection Process
How your organization approaches and values ESG is becoming an important part of the underwriting process for insurers, especially as a method to indicate whether a company has a higher probability for losses from emerging risks and potentially harmful exposures.
Among ESG concerns, underwriters will view a lack of environmental and social consciousness as a reputational risk. Further, a core ESG concern is climate change, and the increased risks that global warming can bring to an organization.
ESG directors and officers risks often include corporate reputation, project financing, diversity, equity and inclusion, lobbying, and corporate ESG coordination.
The ESG underwriting criteria runs much deeper as well, with a footprint that extends to an organization’s supply chain and its customers. An organization may have a proactive ESG approach, but if suppliers or customers fail to have an approach that may reflect poorly on the organization. This could factor into the organization’s ability to secure the desired insurance at the desired price.
While insurers are becoming more eager to work with businesses that have positive ESG outcomes, it may not be the case for some industries. Firms in carbon-intensive sectors such as oil and gas and coal mining, for example, could be more challenged to secure cover with some carriers as a result of lower ESG outcomes. For them, the goal will be to reduce their carbon footprint by finding ways to be more ESG-attuned, while continuing to produce oil and gas.
Evaluating a company’s ESG strategy from an underwriting standpoint is still in its early stages -- select ESG predictors can identify a potential issue and help organizations take actions to reduce the impact of risk.
ESG transparency and data are becoming critical at renewal, as carriers demand more insight into how their customers operate. The current hard insurance market has increased the emphasis underwriters place on clear information disclosure -- ESG adds to the number of data points that must be collected for underwriters.
- There is much insurer focus on the transition risk as organizations move toward a carbon neutral future. Being able to show a plan for improvement will help facilitate continued partnership with carriers.
- Organizations receive credit for stating their ESG intentions but will get more credit if intentions are translated into definable and measurable actions. Use external communications -- if businesses are not telling the world what they are doing they are not getting credit.
- Differentiate ESG activities with a strong narrative, preferably as well as, or better than, industry peers. Focus on intention (policy) and outcome (metrics) and set targets where reasonable.
- Communicate through 10K/Q, proxy statements, sustainability reporting and the company website. Take command in communicating ESG actions. If businesses do not control their narrative, someone else will likely be doing it, and it may not be the desired narrative.
Aside from renewing their existing programs, businesses might equally ask what the insurance markets are doing to help insureds mitigate and manage the new risks presented by ESG. There are some areas where traditional coverage addresses ESG “event-based” incidents such as pollution, public and product liability, D&O and health insurance.
However, 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.