2 Critical Steps to Enhance ESG Underwriting Outcomes

Why is environmental, social and governance (ESG) performance important? It’s not an idle question. How a company performs across each ESG element increasingly defines the organization. These elements include environmental concerns, such as climate change and pollution; social considerations, including employee wellness, diversity and equality; and governance issues, such as culture, conduct and integrity.

Many companies are working hard to develop ESG strategies as, for example, climate change accelerates the urgency of addressing carbon emissions and their impact on the environment. Investors, insurers and other stakeholders — many of whom used to make decisions primarily based on a company’s tangible assets — are now using ESG as a lens. This evolution has direct implications for risk management as underwriting criteria change and the ability to access insurance markets continues to shift.

Let’s dive into what underwriters look for — both in initial and ongoing assessment of ESG performance metrics — and what risk managers can do to help mitigate ESG-related risks.

ESG 101: What Are Underwriters Looking For?

According to Bloomberg, ESG-based assets could exceed $53 trillion by 2025 — more than a third of total assets under management.¹

As risk managers seek to migrate their portfolios toward opportunities that prioritize positive ESG outcomes, they should consider two critical steps:

To Start: Make ESG Part of Your Risk-Selection Process

The first step is to determine what underwriters are looking for in the risk-selection process. A lack of ESG standard metrics has created a fractured set of methods for measuring an organization’s ESG footprint. It’s sometimes easier to list what to avoid:

• The reputational risk that comes with a lack of environmental and social consciousness
• Heightened risk from climate change and global warming
• Risk associated with not prioritizing critical issues such as corporate reputation and diversity, equity and inclusion
• Third-party risk from customers, suppliers and other vendors

KEY QUESTIONS:
Does your risk-selection process extend to your supply chain and customers? If you work in a carbon-intensive industry, for example, what KPIs are you establishing to reduce the company’s carbon footprint in a meaningful way?

To Continue: Build ESG Transparency for Renewal

Underwriters will seek ongoing insight into how a company operates as they contemplate renewal issuance. This will require companies to collect and communicate even more data and information, such as:

• Evidence of plans to move toward a carbon-neutral future
• A track record of translating intentions into definable, measurable actions
• Defining a strong narrative built around policy, metrics and controlling the external perception of the organization

KEY QUESTIONS:
Do you have clear, measurable ESG targets tied to a specific purpose and timeline? How do you showcase your ESG credentials?

ESG performance holds significant implications for myriad stakeholders, including risk managers. While ESG outcomes are increasingly viewed as a core performance metric of an organization, underwriters want to know exactly how companies are managing their ESG risks and opportunities. That’s why understanding what underwriters are looking for — and planning accordingly — is ESG 101.