8 things to keep in mind when developing your ESG credentials
December 10, 2021 Miqdaad Versi
As the 2021 United Nations Climate Change Conference (“COP 26”) comes to an end, there is a renewed focus on climate change, and with that the broader ESG agenda. ESG affects all aspects of an insurance company’s operations. At the highest level, insurers are able to promote ESG in the wider market by recognising its benefits in their underwriting and investment practices, and they must lead by adhering to high ESG standards themselves.
There is no lack of guidance or regulation, both within the UK (Lloyd’s mandate for London Market, CBES) and internationally (TCFD, PSI, UN PRI, CFRF), with re/insurers responding in a number of ways, including the setting up of the Net Zero Insurance Alliance. However, it can be unclear where to start.
Here are 8 things for any re/insurer to keep in mind, when developing your ESG credentials and how to embed ESG across the business:
1. Determine scale of ambition and extent to which you want to lead and influence others vs. follow the pack and the minimum requirements
2. Define specific deliverables, both qualitative and quantitative, for internal and external purposes, to reflect the scale of ambition
3. Set up an ESG Governance structure that will drive momentum e.g. Board / Exec level oversight, with a dedicated working group to implemented proposed changes
4. Assess climate risk within all relevant elements of the risk management framework and models, including reputation risk
5. Gather data to measure ESG contribution of your own company (e.g. using external scores, calculating carbon footprint of facilities / staff, assessing investments for GHG contributions, scoring suppliers), and work towards developing an internal ESG score for customers to supplement external scoring
6. Identify, cost and deliver initiatives to embed ESG within the business including improving diversity & inclusion policy, developing travel policy, using ESG scores as part of procurement policies (e.g. minimum criteria), divestment from high-carbon sectors, engagement in charitable initiatives
7. Reflect on your business strategy including assessing and optimising ESG credentials of product & sector mix, defining impact of customer ESG scores on the front-line pricing, engaging customers on ESG through conversations & data requirements on their transition plans
8. Demonstrate accountability and transparency including by regular reporting on identified metrics, and progress towards publicly stated ambitions
ESG will define the next strategic planning cycle for many corporates and is likely to be as enduring as the rise of technology given that climate change and other sustainability topics will be with us for the rest of our lives. Management teams should take a broad view of ESG and see it as both a cultural and business transformation. In our experience, forward thinking management teams will find opportunity in this period of upheaval. Those who take a broad, integrated approach will develop break-out business strategies welcomed by investors, make better investments and engage with the best partners, and have the most engaged workforce.
To discuss how to develop your ESG credentials or embed ESG across your business please contact us below.
Principles Sustainable Insurance
The Principles for Sustainable Insurance (PSI) initiative was launched in 2012 and comes under the umbrella of the UN Environment Programme Finance Initiative. This body offers sustainability guidance for non-life insurers and as recently as June 2020 published its newest guide on how to integrate ESG practices into global insurance.
Principles for Responsible Investment
The Principles for Responsible Investment, or PRI, were established in 2006 with Munich Re and Aviva as founding signatories. Supported by the UN from its inception the PRI includes a commitment to promote and incorporate ESG principles in investments while maintaining transparency in decision making. Since 2006 PRI membership has grown to over 3700 signatories with expansion picking up pace since 2015.
Net Zero Insurance Alliance
Bank of England, Climate Biennial Exploratory Scenarios (CBES)
The Bank of England has launched Climate Biennial Exploratory Scenarios (CBES) to assess the resilience of the UK’s largest banks and insurers to climate risk and will set the agenda for further regulatory scrutiny over the next decade.
Following the release of their first ever ESG report last December, Lloyd’s mandated that managing agents must create an ESG framework and strategy in 2022, for consideration and sign off in the 2023 business planning cycle. This announcement was followed up by the Lloyd’s joining the United Nations Net Zero Insurance Alliance (NZIA), committing the marketplace and all its insurers to reach a net-zero underwriting position “by 2050 at the latest”.
Climate Financial Risk Forum
In March 2019, the PRA and FCA jointly convened the Climate Financial Risk Forum (CFRF) as an industry forum which continues to publish advice and includes insurance members such as Aviva, L&G, and RSA.
Amid the pandemic, the CFRF published its latest guidance for firms in June 2020 in their words “written by the industry for the industry to help financial services firms approach and address climate-related financial risks.”
Task Force on Climate-Related Financial Disclosure
The Financial Stability Board, the international body, established the Task Force on Climate-Related Financial Disclosure (TCFD) to “develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”.