Over the last five years, the demand for environmental, social, and governance (ESG) elements of different organizations has seen a sharp rise as investors, regulators, clients, and employees alike found themselves with a growing interest in sustainability. With unpredictable weather patterns and climate-related disasters getting more and more attention in the media, public interest has surpassed simply being concerned and morphed into requiring a sustainability initiative from many companies, if they want to stay popular and accepted. These initiatives tend to go hand-in-hand with social and governance problems too.
Looking at the financial sector first, there is a massive focus on the European Union’s (EU) recent introduction of a classification system, establishing a list of environmentally sustainable economic activities, known as ESG taxonomy. But this is only a small step towards a long road to sustainability. The commitment to reaching carbon emissions of Net Zero is also a strategic goal, but having this dream is different than having a step-by-step plan to make it happen; we need a blueprint before it can be put into action by organizations.
The challenges are slowly coming to light but that isn’t necessarily a bad thing. It also means there is enough interest in moving towards sustainability to have detected these problems in the first place. As of right now, in the financial sector, interest in sustainable investment is higher than supply, meaning there is a driving force behind progression. So, let’s look at some other factors, pushing these advancements forward too.
#1 The Future of ESG and Insurance Coverage
Primarily, we see ESG slowly becoming a mainstream, or even system relevant, topic thus being looked at much more closely than in the past. The majority of the issues currently fall under the purview of regulatory and central bank requirements that relate to the reduction of CO2 emissions. However, future issues such as biodiversity loss and supply chain bottlenecks are beginning to come to the forefront.
But how does this affect us directly? It may not seem like there are any current insurance issues related to these risks but take a second to look at it on a micro scale. In 2022, for example, there’s no harm in continuing to insure coal power plant operators. However, the EU deemed natural gas and nuclear power sustainable, but not coal. So fast forward 10 or 20 years down the line, how will that decision look when these plants are less lucrative and begin to close and/or operators’ health risks become more prevalent? Will insurance policies then be required to cover problems that the EU predicted decades in advance?
#2 Increased Accountability Worldwide
Throughout the last 2 years, ESG in both the insurance and financial worlds have begun to overlap. Many carriers have to look at not only their ESG investments, but what their vendors’/policyholders’ contributions are too.
Before making an investment, many are feeling pressure to consider the big picture. For example, if a carrier is insuring an oil company, what are the odds of an oil spill that would create a major environmental setback? Or, another important question, would the money they generate from that policy outweigh their own morals, or the financial benefits of being transparent with the public about green investments? Now, carriers must hedge the risks of ESG requirements while also keeping their own goals in mind.
Quickly, risk assessment requirements are becoming more common too, but as of now, that data is still scarce.
#3 ESG-Specific Data
Next, data is a less-explored catalyst of ESG advancements. That, and analytics, are at the center of every ESG approach. The quality and amount of data will become increasingly more important as we are forced to be more transparent with ESG disclosure and risk analysis.
Currently, there are different standards for ESG-related data, making it nearly impossible to draw comparisons. Worldwide, standardization of this information, and creating a rating system, will soon increase the accessibility of these resources and acceleration of ESG in general.
#4 Avoiding Greenwashing
What is greenwashing? According to Sustain.Life, a sustainability management software, greenwashing is a deception tactic—whether intentional or accidental—employed by companies that can cause customers to believe its products, services, or mission are more environmentally impactful than is true. Luckily for all of us, as ESG becomes more mainstream, it will be a lot more difficult to greenwash standard products. The amount of available data will expand tremendously and create a general measure of ESG, leading to greater transparency.
#5 Not Only “E”, but Also “S” and “G”
2022 will see the trend of customers and employees demanding clarity, diversity, and social equity to continue. It will be the year that focus shifts to the stakeholders.
In terms of customers, it’s important to be able to include the right policyholders in one’s own portfolio, who don’t shy away from new expenditure related to ESG investments. Additionally, from a corporate perspective, the war of talents has begun reflecting the expectations of the next generation, and if you want to hire the right people, you have to make the right investments.
#6 Implementability
The blueprint was designed long before now, so it’s time to put the plan in motion. And as we get ready for the next step, implementation, it’s typically accompanied by “who’s going to pay for it?”. This is a challenge because current efforts to reach Net Zero aren’t sufficient everywhere, they may meet internal requirements but not necessarily external. This means that within many companies, the budget for ESG is already maxed out as corporations meet their own goals, not including mandatory involvement on a national or global level.
And for carriers who are fully committed to ESG, will they morally continue to serve non-compliant customers? If not, what will that change about their business models? The question remains whether it’s possible to accurately assess and continuously monitor this type of compliance, or if we are still lacking the data to do so.
What’s Next
As expected, 2022 will be a challenging year. Recovery from COVID-19 continues as we begin to ramp up the troops on our way to reaching Net Zero, along with seeing more biodiversity, social equity, and proper governance. From FRISS’ perspective, the insurance industry is ready to take on the challenge. Click here to read our blog from ITC, the biggest insurance event in the United States, and how sustainability was a main topic throughout the conference there too.
