EY
Developing a sustainability strategy: five key stakeholders to consider
By thinking through the needs of their key stakeholders, insurers can develop and execute a comprehensive ESG strategy, say Meredith Jones and Theodore Potgieter of EY.
“The affordability of insurance in the face of increasingly frequent and severe natural disasters is top of mind for customers.”
Meredith Jones, EY
No matter where you look sustainability and environmental, social and corporate governance (ESG) considerations are on the agenda. With more frequent and severe natural disasters, insurers and reinsurers (including those focused on property and casualty, life, and directors and officers (D&O), among others) find themselves on the front lines of the “E”, but regulatory bodies, corporate boardrooms, industry associations, investors and ratings agencies are also putting insurers in the ESG cross-hairs.
With more than 900 subcategories of ESG, depending on industry, developing an ESG strategy can be both daunting and challenging. It can be helpful to think of ESG as a stakeholder-focused, rather than shareholder-oriented, issue. By thinking through the needs of their key stakeholders, insurers can develop and execute a comprehensive ESG strategy.
Regulatory bodies
Regulators differ from other stakeholders in that they themselves face strong pressures from several of their own stakeholder groups. While most have a core responsibility to act to ensure growth, maintain micro and macroprudential financial stability, and protect customers, regulators also must balance this against pressure from politicians, industry groups, investors and clients, and society at large—all of whom are not homogenous groups.
The US Securities and Exchange Commission (SEC) climate risk disclosure proposal is a prime example of the forces at play, with the proposal generating nearly 15,000 comments over three months and, upon resolution, prompting proposed legislation at both the federal and state levels.
Despite this push/pull dynamic, regulation is definitely increasing across all jurisdictions, which is a trend we expect to continue (Figure 1).
Determining the correct pace of change is also a difficult balancing act for regulators. Addressing ESG and climate risks to insurers will require more stringent regulations and reporting, and rapid mobilisation by insurers. However, regulators receive strong pushback when moving quickly and must balance progress with a company’s ability to meet the requirements.
The Bermuda Monetary Authority’s guidance on management of climate risks provides an example of regulators balancing these factors with a gradual implementation of regulation, beginning with foundational disclosures in regulatory reporting, followed by full implementation of the climate risk framework in 2025.
Figure 1: Growth in ESG reporting instruments over time (to October 2021)
Source: Review of Trends in ESG Reporting Requirements for Investors report 2022, UN Principles for Responsible Investment, 2022
Investors
While recent regulatory developments have pushed companies to progress more uniformly on ESG issues, a primary driver for corporate issuers has historically been investor pressure. An EY study[1] projects that by 2025, up to $53 trillion in assets under management will focus on ESG. Large asset managers have been leading this charge by screening investment portfolios for top ESG performers while also engaging with ESG laggards.
The number of ESG-focused shareholder proposals almost doubled from 128 for the full year 2021 to 221 for the first half of 2022[2]. For public companies, understanding how your shareholders think about ESG can be critical in developing a compelling strategy. Some questions to consider include:
- What ESG inputs do they use? In many cases, ESG ratings, such as MSCI, Sustainalytics, Fitch or other commercial ESG ratings, may serve as the basis for ESG analysis. If that’s the case, ensuring timely and adequate disclosures to those entities is crucial.
- What commitments have their investors made? Their net-zero commitments will have implications for companies in their investment portfolio—whether the investor will buy or sell them over time.
- What are their engagement priorities? Many asset managers develop annual campaigns around pertinent ESG activities, such as diversity, equity and inclusion; board oversight and executive compensation; or Task Force on Climate-related Financial Disclosures disclosure. Understanding these initiatives can help proactively position a firm for success.
“It is important that community relations and social licence considerations are part of a comprehensive ESG strategy.”
Theodore Potgieter, EY
Customers
From an insurance perspective, customers (clients or cedants) are primarily concerned with the financial resilience that insurance brings. Being uninsured or underinsured, especially in disaster-prone areas, can be devastating. Many Floridians are now experiencing this first-hand, as only 18.5 percent of those under a mandatory or voluntary evacuation order during Hurricane Ian had flood insurance through the National Flood Insurance Program[3].
Those who did not may now face catastrophic and life-changing financial consequences. At the same time, the affordability of insurance in the face of increasingly frequent and severe natural disasters is top of mind for customers. Looking again at Florida, the volume of property insurance claims has driven insurance premiums to three times the national average[4].
It’s not just property and casualty insurance that is seeing increasing premiums. More broadly, life insurance, D&O and other insurance offerings are feeling the impacts of environmental and social pressures.
Insurers must consider the impact of their businesses on their customers, confirming financial stability to pay claims, balancing profitability with premiums and innovating new solutions to foster financial resilience.
In addition, customers are paying increasing attention to the way companies do business. As Millennials and Gen-Zers become the primary customer demographic, expect to be asked: How do you treat employees? How diverse are your board and C-suite? How do you interact with the communities you serve? What are you doing to protect customer data? Survey after survey reveals customers want companies to proactively address ESG demands with action, resources and transparency.
Employees
Given low unemployment, the Great Resignation, and the challenges of returning to the workplace in a post-pandemic world, it can be difficult to recruit and retain talented, engaged and focused employees. The insurance industry is not immune to this trend; according to a recent study, that pressure could be especially acute for insurers: 72 percent of insurance companies plan to increase staff in the next 12 months, a 16-point increase from 2021 in the US[5].
Millennials became the largest demographic in the workforce in 2016 and will represent 75 percent of workers in the next five years based on a global workforce study[6]. In another study, nine out of 10 US workers said it was important to work for a sustainable company, and 82 percent were looking for ways to help their company become more sustainable[7].
Additional research in the US confirms this trend, finding that 40 percent of Millennials have chosen a job in the past because the company performed better on sustainability, and 67 percent indicated that a diverse workforce is important when considering job offers[8].
Based on a Swiss study on retention, more than half of all employees in 2021 were open to leaving their company for new roles, but this percentage drops to 12 percent if employees believe their company is making a positive impact in the world[8].
Social licence to operate/community
Social licence to operate means that a company conducts business that is viewed as additive to people and the planet in a way that is also viewed positively. Maintaining social licence, which can also be thought of as a key component of brand or reputation, is key for financial performance. In a survey of 1,000 business leaders from firms with more than 250 employees, Signal AI found that 72 percent of those polled believe that reputation will be a bigger driver of business performance than margin over the next five years, with 92 percent believing that ESG would impact reputation[9].
While the environmental factors are a natural and appropriate focus for many insurance companies, the social and governance factors are important as well. Building and maintaining social licence to operate requires strong business ethics, truth in advertising, competitive market behaviour, diversity in the workplace, community outreach and more. Interacting with the community through charitable and volunteer activities, particularly in the wake of a natural disaster, being a good employer and delivering on product promises are great opportunities to build reputation and authentically embody company values.
While this may seem muted in relation to some of the other groups we have highlighted, it is important that community relations and social licence considerations are part of a comprehensive ESG strategy and not haphazard or sporadic.
Conclusion
Think carefully about the way your firm interacts with each of the stakeholder groups. A good way to get started on the journey for some insurers is by performing some sort of materiality assessment to develop a robust and informed ESG strategy and roadmap.
While that may seem more like a “nice to have” than a “need to have”, it is also true that studies have generally shown a positive relationship between ESG and corporate financial performance (CFP). One meta-analysis of 1,000 papers on the topic found that 58 percent of the studies that focused on operational metrics, such as return on equity, return on assets or stock price, revealed positive correlation between ESG and CFP, while only 8 percent showed a negative relationship, meaning ESG can benefit yet another important stakeholder: the bottom line[10].
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organisation cannot accept responsibility for loss to any person relying on this article. The EY region of member firms in the Bahamas, Bermuda, British Virgin Islands and Cayman Islands is aligned with EY Americas Financial Services Organization, headquartered in New York. EY teams serve the banking and capital markets, insurance, and wealth and asset management sectors providing a full suite of assurance, consulting, strategy, tax and transaction services with a focus on providing seamless, exceptional client service. ey.com/en_us/bbc
[1] “How to realize the full potential of ESG+”, EY website, https://www.ey.com/en_gl/sustainability/realize-potential-esg-plus
[2] “ESG-Related Shareholder Proposals–Takeaways from the First Half of 2022”, Orrick website, https://www.orrick.com/en/Insights/2022/07/ESG-Related-Shareholder-Proposals-Takeaways-From-the-First-Half-of-2022
[3] “Hurricane Ian exposed a flood insurance nightmare for homeowners in Florida”, NBC website, https://www.nbcnews.com/news/us-news/hurricane-ian-florida-flood-insurance-nightmare-homeowners-rcna51514
[4] “Florida’s home insurance market was a mess before Ian. It’s about to get worse”, CNN website, https://edition.cnn.com/2022/09/30/business/florida-homeowners-insurance-ian/index.html
[5] “Insurance Labor Market Study Finds 72 percent of Companies are Planning to Increase Staff”, Businesswire website, https://www.businesswire.com/news/home/20220217005916/en/Insurance-Labor-Market-Study-Finds-72-of-Companies-are-Planning-to-Increase-Staff
[6] “Millennials in the Workplace Statistics: Generational Disparities in 2022”, TeamStage website, https://teamstage.io/millennials-in-the-workplace-statistics/
[7] “Do This to Engage Millennials and Boost Sustainability: Boost company sustainability and retain and engage Millennials by improving recycling in the workplace.”, Inc. website, https://www.inc.com/ryan-jenkins/do-this-to-engage-millennials-and-boost-sustainability.html
[8] “How can people analytics put humans at the center of your ESG strategy?”, EY website, https://www.ey.com/en_ch/workforce/how-can-people-analytics-put-humans-at-the-center-of-your-esg-strategy
[9] “Signal AI Launches Report on Reputation and Business Performance and Unveils New Technology that Measures Shifts in Corporate Reputation”, SignalAI website, https://www.signal-ai.com/press/signal-ai-launches-report-on-reputation-and-business-performance-and-unveils-new-technology-that-measures-shifts-in-corporate-reputation
[10] ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015–2020, NYU Stern Center for Sustainable Business, 2021.
Meredith Jones is a managing director at EY, based in the US. She can be contacted at: meredith.jones@ey.com
Theodore Potgieter is an associate partner, Business Consulting, at EY Bermuda, part of the EY region of the Bahamas, Bermuda, British Virgin Islands and Cayman Islands. He can be contacted at: theodore.potgieter@bm.ey.com
