ESG aspects play an increasingly important role when it comes to allocating insurers’ monies. Apart from these legal requirements insurers have already installed many ESG measures in their companies on a voluntary basis.

ESG and Sustainable Risk Management

Media headlines are dominated these days by the tragic news of the Ukraine war, the threat of further SARS-
CoV-2 mutations leading to new pandemic phenomena as well as the spectre of inflation that is haunting the global community. While these problems may be overcome in the medium-term, the fight against climate change and other widespread problems is here to stay.

Insurance as key stakeholder in the Green Deal

In their function as both risk carriers and investors, insurance companies are expected to contribute to many measures within the framework of the European Union Green Deal and to influence society in general. Although they offer intangible products and will thus probably not pollute the environment, there is a lot of things insurers can do. EU legislation has set out the rules for this part of the financial market through the:

  • Taxonomy regulation (2020/852 EU) applicable to all branches of the economy
  • The Regulation 2019/2088 “on sustainability-related disclosures in the financial services sector
  • The Delegated Regulation 2021/1257 concerning “the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products”, in force as from 2nd August, 2022
  • A set of Regulatory Technical Standards issued by European supervisor IOPA to be published during the course of this year.

Apart from these legal requirements insurers have already installed many ESG measures in their companies on a voluntary basis, the details of which are published in annual sustainability reports – attached, in most cases, to the annual financial reports. There is no standard yet regarding content and presentation of these reports, unlike financial reports that follow specific standards (e.g. IFRS –International Financial Reporting Standards). Although reports tend to look like marketing presentations, their contents are impressive, showing first substantial results and the direction further developments may take. Exemplary activities comprise the following fields of operation.

Underwriting and insurance products

Major international insurance groups founded the Net Zero Insurance Alliance in 2021 with the target to reduce insurance of coal risks (mining, transport, thermal use) to zero and to decrease the capacities for oil and gas risks (prospection, production, transport, thermal use). Other insurers will follow.

Moreover, there is a clear increase in offering insurance capacity and services for new, green technology despite
initial experiences that new technical applications may constitute a higher risk exposure.

It can be expected that insurance questionnaires will contain queries not only in respect of traditional risks
but also regarding details of ESG in general. After 2023, sustainability reports will become one of the basic documents for underwriting decisions and the calculation of insurance rates.

Investment and financial products

ESG aspects play an increasingly important role when it comes to allocating insurers’ monies. The Net-Zero Asset Owner Alliance, established by large asset owners stipulates that there will be no purchase of shares or granting of loans for industries engaged in coal and other environmentally critical business or for those who cannot give satisfactory answers in respect of their general ESG behaviour and measures.

These monies will be reinvested in promising new green technologies and projects that develop both enviromental and social sustainability on a world-wide scale. Investments focus not only on energy production but also on projects for the sustainable use of water and other natural resources or for cleaning polluted areas. Deciding on an investment therefore means considering not only the enterprise itself but also its suppliers, clients and cooperation partners.

This change in investment strategies not only concerns insurers’ own investments but extends to the creation of
investment products in connection with life and pension insurance, the so called PRIIP. First data show that billions of Euros have already been re-allocated in this manner.

Insurance operations and ESG

As the main operation costs of insurance companies consist of expenses for personnel, IT, energy and office space, many decisions can be made in compliance with ESG targets.

Remote working, which had its breakthrough during the pandemic, will be maintained. It reduces traffic volumes
because employees no longer commute every day, and cuts on costs for heating and cooling office spaces. Energy supply will shift to green energy produced on the spot by e.g. solar panels mounted on rooftops. Corporate build-ings with a glass facade will be equipped with better shading, and (air) travel for business purposes will be reduced to a large extent. The supply of office equipment and energy is constantly evaluated, material will have to be produced in a sustainable way, and energy will need green certificates. The use of paper has already been reduced through electronic communication with clients, partners and within the company.

Social and Governance targets

Some companies are running skills enhancement programmes to make employees aware of and fit for ESG
requirements, while increasing job satisfaction.

Gender diversity, up to management board level, has already been given much more attention than in the past
years. The focus is now on equal training opportunities for both sexes at an early stage with clear perspectives for further career options that are based on skills and knowledge.

Many companies and their employees support initiatives that reduce the vulnerability of society beyond the scope of insurance indemnities by lending a helping hand in catastrophes, assisting and supporting our elderly, refugees or even precarious households both financially and through direct action.

Subsidies and grants are given to non-profit organisations, educational facilities, research laboratories and other institutions in order to overcome the problems we are facing in the entire world.

The insurance sector is very well capitalised, there is knowledge about opportunities and risks as well as an acute sense for catastrophes and how to avoid them. These factors provide the grounds for the industry contributing its fair share to making the world a better and safer place. This is it what ESG is about.

This article is a part of our latest Spotlight publication focusing on supply chain issues. Read the publication and learn more about how you can protect your business from changes and unpredictable supply chain disruptions.

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