Insurers and the ESG revolution—the vital dimensions for success

Soon, it won’t be enough to have environmental, social and corporate governance (ESG) targets on diversity and inclusion or emissions reduction; these targets will need to be benchmarked, measured, disclosed, tracked, and assured. Re/insurers must also manage these exposures, given the potential and unknown impact of climate change.

If you consider the role of an insurance company in our society, insurers have great potential to be a force for good and are, perhaps, uniquely positioned to drive change.

Insurers play a critical role in enabling individuals to plan for risks and thrive. They also facilitate the transfer of risk—and risk-sharing solutions—as a fundamental building block for the economy.

In addition, insurers can use this platform to step into a role as both an innovator and an influencer, driving change in the way companies think about their role in sustainability and ESG. As part of multifaceted organisations with significant capital and a talented workforce, they have the resources to make a big impact. In short, insurers and reinsurers have a unique responsibility to influence behaviour and help accelerate ESG outcomes.

Climate change provides opportunities for insurers to use their risk and underwriting expertise to manage and minimise risk. It is hoped that the Bermuda market will be able to harness its technical expertise and innovation to better mitigate climate risks and build resilience across the finance industry and wider global economy.

Minister of finance, Curtis L. Dickinson, has said that Bermuda could become the world’s centre for climate risk finance—with climate risk as “a natural extension” of the reinsurance portfolio.

Insurers are in various stages of maturity. Those with headquarters or significant operations in Europe may be a bit further along in their ESG journey, but as the US market starts to demand more transparency around ESG initiatives and more robust ESG metrics and disclosures, others are quickly playing catch-up.

Broadly speaking, not all companies have formally defined a strategy and framework to measure progress against that strategy.

To categorise insurers on relative maturity, we could fit them into three categories:

• Beginning: They may have bare minimum or lower-quality reporting and disclosures in relation to corporate and social responsibility. It is likely that they have not considered the perspective of stakeholders or actively engaged with them to determine what are the most material ESG topics. Consequently, they may not be aligning internal activities in the most effective manner.
• Developing: They might be publishing a sustainability report or webpage, but don’t have a cohesive ESG strategy that is embedded in their core operations. They may be using more ad hoc data-gathering processes and not actively considering the internal controls required to do ESG reporting consistently, with increasing frequency and with high-quality information.
• Embedded: Actively engaging with their board and related risk/audit committees and embedding ESG targets in aspects of their core operations. They will have adopted commonly accepted ESG and sustainability frameworks such as Sustainability Accounting Standards Board, Task Force on Climate-related Financial Disclosures, and Global Reporting Initiative to guide ESG goals and disclosures. Robust processes, controls and governance would be in place to ensure disclosures are investor-grade. Company ESG metrics and policies may also be assured by independent accountants. Finally, if an insurer is investing assets, ESG would be embedded into their investment as well.

Investors want to know that insurers are thinking about appropriate and material ESG risks and opportunities, and that they are incorporating those topics into the company strategy. They also want insurers to disclose ESG efforts in a decision-useful way so that investors can gauge progress and use information to compare carriers and assess investment opportunities in other industries.

They want disclosures to be based on commonly accepted, investor-grade standards. In addition, they want qualitative context and quantitative metrics on material ESG topics.

PwC typically sees information prioritised around topics such as climate change vulnerability, diversity and inclusion, workforce of the future (human capital management), insuring health and demographic risks, responsible investment, business integration, privacy and data security, and corporate governance.

Investors want to understand an insurance organisation’s ESG priorities and the only way to provide this information is through clear and specific reporting.

Undoubtedly, climate change is one of the most pressing issues facing the global economy, and it introduces specific risks and opportunities for insurers and reinsurers—especially when considering how future emissions scenarios may play out.

There is growing regulatory and stakeholder pressure for this to be seriously considered by insurers in their business processes and disclosures. For example, the New York Department of Financial Services (DFS) asked insurers to identify a management function and board committee to address climate change and disclose key non-financial metrics.

Climate risks for insurers are typically considered from both physical and transition risk perspectives. These risks can impact all aspects of an insurer’s business, and they should carry out impact assessments to understand how climate change is likely to impact their assets, liabilities, operations, and materiality.

Insurers should also develop action plans to help mitigate those impacts. For example, property insurers will need to consider how to adjust their pricing to allow for changing patterns in weather-related claims and consider the effect of climate on demographics—where people live, and the resulting impact on their strategy.

Transition risk refers to the risk arising from the transition to a low-carbon economy. It also refers to the fact insurers may need to revisit their investment policy to rebalance their investments as they evaluate the impact of a transitioning economy on the companies they hold assets in.

International regulators have pushed on ESG topics for many years, and we are seeing increased communications in the US, similar to the recent New York DFS announcement.

Regulators worldwide are taking a keen interest in ESG reporting and disclosures, and their actions will impact insurers operating in the US and abroad.

We expect that additional guidance from the US Securities and Exchange Commission on expectations for non-financial disclosures such as ESG will continue.