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 need to plan for the increasing focus on ESG as a part of their overall risk management strategy, and must be aware of the significance this brings to their risk management strategy, especially as insurance 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. As a risk manager, ask yourself these questions:
- Environmental: Does your company produce greenhouse gases? If so, what are your plans to transition to renewable sources of energy?
- Social: What is your company’s impact on issues around social justice and diversity, equity and inclusion (DEI)? And what strategies can you point to going forward to improve your company’s societal impact?
- Governance: Do you adequately disclose how you compensate executives? How does your company’s ethics policy compare to best practices?
Each element is important, both individually and when taken as a whole.
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. That's because insurers are using ESG as a method to indicate whether a company has a higher probability for losses from emerging risks and potentially harmful exposures.
For example, underwriters will see a lack of environmental and social consciousness as a reputational risk. Another core ESG concern is climate change, and the associated risks to an organization.
Directors and officers (D&O) risk buyers have their own concerns related to ESG, including:
- Risks to corporate reputation
- Project financing
- Concerns about DEI
- Corporate ESG coordination.
Underwriting criteria around ESG runs much deeper as well. Its footprint extends to an organization’s supply chain and its customers. While an organization may have a proactive ESG approach, but a supplier or customer's less effective approach 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 generally becoming more eager to work with businesses that have positive ESG outcomes, there are industry specific exceptions. Firms in carbon-intensive sectors such as oil and gas and coal mining could be more challenging to secure coverage 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 sensitive to ESG concerns, while continuing to produce oil and gas.
Evaluating a company’s ESG strategy from an underwriting standpoint is still a relatively new concept -- select ESG predictors can identify a potential issue and help organizations take actions to reduce the impact of risk.
In addition to renewing their existing programs, businesses might ask what the insurance markets are doing to help 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.