ESG: the insurance challenges and opportunities

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Insight
Ali Smedley

During July’s week of record-breaking UK temperatures, we hosted our first climate and Environmental, Social and Governance (ESG) discussion group. We were joined by insurers, brokers and others to discuss the key ESG issues the insurance industry is facing - now and in the future. Some important themes emerged, from how to collect and standardise ESG data to how to stick to net-zero goals. 

This article gives an overview of some of these key issues. For a more in-depth review of these topics, you can download our Climate Change Risk Regulation and Measurement report here.

ESG: inconsistency in reporting remains

Whilst there is a wide consensus on the definition of ESG, what is reported can differ greatly for each insurer. In the past, companies have been able to take a principles-based approach to reporting for their ESG. A variety of recommended sustainability disclosure frameworks has made consistent reporting challenging. 

When reporting on the ‘E’ of ESG, a company’s own greenhouse gas emissions has tended to take the focus. Insurers are increasingly looking at other environmental issues outside of climate change, such as biodiversity loss, but there is no consistency in reporting approaches. 

Insurers also have different views on topics such as underwriting and investment exclusions. Rather than making underwriting exclusions for fossil fuel companies, an insurer may only provide insurance if they have a “strong transition strategy”. But different insurers may have different views on what a strong transition strategy is, creating ambiguity.

In November 2021 at COP26, the International Sustainability Standards Board (ISSB) was announced. The intention of the ISSB is to deliver a global sustainability-related disclosure standard. It is currently in consultation for release in late 2022. The creation of a global standard will ensure that companies, and their stakeholders, can understand the materiality of all the company’s risks and allow for companies to integrate their sustainability and financial reporting more efficiently.

Whilst there are moves to create more standardised sustainability reporting, it will ultimately be down to each insurer to create and execute their own ESG strategies. For those insurers that have spent less time working on ESG, advice and learning from those with more experience is likely to be of help - hence why we have started our ESG working group.

The data issues for evaluation
 
For ESG-related data on insurance clients, insurers and brokers tend to use a mixture of third-party ratings and surveys sent to clients. Both sources of data face challenges in their use and usefulness. Having a market-wide set of questions that are used to request data from clients may be beneficial. Additionally, this data is being sent in a variety of formats, making it difficult to ingest and use. 

The data ingestion and extraction issue
There is currently no consistent standard across the industry for receiving data. There is also an increased likelihood of large volumes of new unstructured data as the industry asks clients for information on their transition strategies. This is creating a large opportunity for third parties to provide solutions to insurers as we discuss in our Data Ingestion and Extraction: The 40 Companies to Watch in 2021 report.

Company surveys - varying levels of disclosure
There is often a mismatch between sustainability frameworks and levels of disclosure between companies. This can be driven by the wide variety of surveys being used by those evaluating, but it is also a question of available data and materiality of the issue for the specific organisation.

Multiple rating frameworks - various methodologies
It can be difficult to choose which ESG data provider to work with. In some cases, insurers may use a mixture of data from several different providers. When making the decision, it is important to understand what goes into the different ESG scores and ratings. Some scores may only look at whether environmental issues have the potential to financially harm the company, such as sanctions for not recycling properly, and not quantify the overall harm that the company does to the environment or society.

“Companies may have a good ESG rating, but there could be nothing behind it. It’s important to drill down into these scores and ask the right questions.”
Chris Illman, Head of Responsible Business, Beazley

Net-zero goals - steps being made to enable more consistent reporting

The Partnership for Carbon Accounting Financials (PCAF) is collaborating with the UN-convened Net-Zero Insurance Alliance (NZIA) to develop the proposed global standard for measuring insured emissions. In July, PCAF gave an update on the development of the standard. This included attribution factor proposals for commercial and motor lines, along with reporting methodology and requirements.

When this standard has been refined and agreed upon, it will make it easier for insurers to act and report on their progress of reaching net-zero. However, long-term net-zero goals can be difficult to stick to. Open reporting every few years may help with this - NZIA members have to meet intermediate targets every five years and are required to give an update. Another potential method of making sure insurers reach these goals is to provide sanctions when targets are not met.

A lot more is to come from InsTech in the ESG space. Keep an eye out for future events, activities and content. If you are interested in learning more about our climate and ESG group, please reach out. To keep up to date on relevant climate and ESG news, you can also subscribe to our monthly Climate Risk newsletter.