Get market insights straight to your inbox
Keep me informed
January 14, 2022 Izak Vickers
ESG has dominated corporate discourse in 2021 and this is set to continue in 2022. With there being so many ESG topics for executives to consider, it is challenging to know how to best divide your time. To help executives narrow their focus, Oxbow Partners have identified 10 ESG trends to pay close attention to throughout 2022.
As stakeholders around the world become increasingly aware of the impact of their daily choices and purchases, many businesses are taking action to implement more sustainable business practices to gain favour with consumers. On the face of it this appears to represent progress, yet to date many companies have started to talk a good game whilst continuing to engage in activities that cause environmental harm.
Greenwashing is the term given for when a company dedicates more resources to marketing themselves as being sustainable than on improving the impact they have on the environment. Expect the term to become increasingly popular in the ESG lexicon in 2022 as stakeholders apply pressure on companies to translate their talk into meaningful action. Regulators will also begin to turn the screw by enforcing mandatory disclosures that force companies to move beyond ‘Green’ marketing & PR to meaningful action.
Until now, regulation intended to mitigate ESG risks in the financial sector has largely focused on the activities of large multinational banks, with insurers having mostly escaped the attention of regulatory bodies. Notably the industry has thus far taken a ‘carrot’ approach to ESG issues, with companies integrating ESG principles into their operations to reap the potential reputational advantages. However, in 2022 expect to see regulators start to bring out the ‘stick’, with companies being issued fines for failing to comply with ESG regulation or misdemeanours related to mandatory disclosures – for example, GHG emissions. Specifically, Oxbow Partners expect to see some progress towards more stringent regulation and guidance, especially on insurers’ investment portfolios.
A sign of the growing importance of ESG & Sustainability issues to global corporations is the appointment of Chief Sustainability / ESG officers to executive management teams. Whilst some of the world’s largest insurers have already moved to installing these roles – for example AXA & AIG – in 2022 we will likely see other industry players following suit. Perhaps these roles may, to some extent, be largely ceremonial and in some cases short-term until ESG is embedded within the business, but it is nevertheless an important step towards placing ESG issues on a higher footing.
The appointment of Chief Sustainability / ESG officers also introduces a level of executive accountability that has been noticeably absent from ESG for far too long. The creation of a standalone role is especially important given the scale of work that many companies need to do regarding ESG. This will likely complement the creation of other ESG committees and working groups as part of the broader ESG governance changes expected in the coming year.
At its core, any ESG strategy is underpinned by data and analytics. Growing mandatory ESG disclosures across the entire operating model represent a significant challenge for many companies. External data sources are likely to develop significantly with ESG scoring tools and international standardisation leading the way. Insurers’ own internal ESG-related data capture during acquisition and renewal will supplement these external sources.
(Re)insurers will also look to software providers for assistance in creating a centralised, single source of truth, which can be used as part of decision making and reporting. Throughout 2022 we can expect all major SaaS providers to finish developing and start pushing their ESG data & analytics proposition.
It is no longer satisfactory for the world’s largest companies to focus solely on their own operations when it comes to mitigating ESG risks – global corporations are expected to lead in tackling our most pressing ESG concerns. These companies are therefore under pressure to ensure their ESG principles are consistent throughout their distribution network/supply chain. To assist with managing ESG risks across their entire ecosystem, several third-party ESG risk management propositions have begun to emerge. Many of these services focus on analysis of the supply chain and procurement processes to identify areas of concern related to ESG risks and the opportunities that exist to safeguard a company from these risks. Disruption caused by COVID-19 has intensified scrutiny on global supply chains and led many companies to focus on improving their supply chain resilience. Given the complexity of the world’s largest companies’ supply chains, many are turning to external consulting services for help.
Get market insights straight to your inbox
ESG has already started to take a central role in companies’ annual reports, investor presentations and corporate strategies, as insurers market their credentials to ESG investors. Moving forward, expect to see ESG increasingly form a part of insurers’ direct customer marketing and communications efforts, acting first as a market differentiator but ultimately as a hygiene factor to winning business in personal lines. Price comparison sites may start using ESG credentials as a filter, as consumers become more socially and environmentally conscious. For insurers, this will mean proving to their customers that they are investing their resources in a socially responsible way and excluding those activities from their portfolios which represent significant reputational or environmental risks. Furthermore, if insurers raise customer awareness of their ESG efforts and work towards making this an industry standard, pressure will increase for others to follow.
Companies around the globe are facing pressure from stakeholders to not only set net-zero targets for carbon emissions, but to demonstrate their progress towards meeting these targets. One solution that many companies have started to implement is carbon offsetting, or the process of compensating for CO2 emissions by participating in schemes designed to make equivalent CO2 reductions from the atmosphere. Examples of such schemes are reforestation, methane capture at landfills, wastewater treatment facilities and investing in energy efficiency technology.
Nonetheless, several environmental groups have openly questioned the benefits of carbon offsetting, warning that companies cannot plant their way out of climate change. This has proliferated the notion that carbon offsetting is a short-term solution to achieving net-zero carbon emissions targets. Despite this, we expect many companies will follow the trend in 2022 by implementing policies, such as offsetting corporate travel emissions by planting trees, as they cause minimal disruption to business activities and generate rapid results. But as public sentiment towards carbon offsetting dwindles, calls for companies to prioritise emissions reductions as a dedicated initiative to reaching net-zero are set to grow over the next year.
The effects of the recent spike in oil prices serves to highlight just how exposed the world economy is to disruptions in the oil industry and the geopolitical volatility of many OPEC member nations. A combination of these factors together with the falling cost of renewable sources of energy, such as wind or solar, means that as we head into 2022, a genuine commercial argument can be made in favour of businesses transitioning from fossil fuels to renewables. Add to this the pressure from governments and activist groups to contribute towards the energy transition, it becomes clear why this will be a key ESG focus area in the boardroom in 2022.
ESG investing has dominated the world of finance over the past few years, with a total of $51.1 billion of net new money being invested into ESG funds in 2020. ESG investors believe that integrating ESG factors into company valuations enhances traditional analysis by identifying newfound risks and opportunities that go beyond fundamental metrics. To date, the flow of investment from ESG funds has been concentrated in North America and Europe, but as the ESG investing landscape continues to become progressively more crowded Oxbow Partners anticipate that many ESG investors will switch their focus to Asia and emerging markets in search of returns.
Attracted by the allure of ESG financing, many companies in these markets will race to develop their ESG credentials as they compete for investment. This aligns with recent regulation and pledges from the Chinese government to ‘phase down’ investment in coal-fuelled power plants, as well as a joint declaration with the US to co-operate in limiting global temperature rises to 1.5C above pre-industrial levels.
An initiative that benefits society whilst increasing demand for insurance products and promoting brand identity in new markets… It’s not surprising that one of the most popular social initiatives for insurers to be involved in is providing affordable microinsurance to low-income people in emerging markets. This is beneficial for society as insurance coverage increases the financial resilience of communities and improves standard of living. Traditional insurance products typically exclude the most vulnerable in society, which means there is a segment of the population that is currently not being served. Whilst providing microinsurance products may temporarily incur a short-term loss for insurers, helping to develop the maturity of the financial sector in emerging economies is a strategic long-term play. As these economies develop, a new pool of potential customers for insurers to service emerges, which offers new growth opportunities. Furthermore, offering microinsurance products today represents an opportunity to build brand identity and loyalty in these markets.
If you would like to discuss any of the issues raised in this blog, such as how to push forward your ESG agenda to be both compliant with the Lloyd’s reporting requirement but also generate business value, please get in touch.
Get market insights straight to your inbox
About the author
Izak Vickers
Izak is a consultant at Oxbow Partners and has worked on technology, operations and strategy projects with personal lines insurers, global reinsurers & across the London Market. Most recently, Izak has worked with a Lloyd’s carrier for eight weeks to develop their ‘digital distribution readiness strategy’. Izak has a Bachelor’s degree in Economics & Management from the University of Oxford.
Contact Izak
