By: Steve Hazelbaker, CPA, FLMI, President, Noble Consulting Services, Inc.
“ESG” stands for Environmental, Social, and Governance. This terminology was first used in 2005 and covers a wide range of matters that may directly or indirectly affect commercial entities. Insurance companies are often at the center of ESG conversations, due to the industry’s influence on the businesses it serves and the large amounts of assets it manages. Because of ESG importance to the industry, insurance regulators are becoming increasingly concerned with ESG issues.
Environmental factors of ESG address how companies perform as stewards of the environment through their energy use, water usage, waste generation, pollution, natural resource conservation, handling of hazardous materials and treatment of animals. Many of the world’s largest companies are significantly dependent on nature. The “E” in ESG gets at how companies treat the environment.
Climate change is a major environmental factor affecting the insurance industry. Climate change has been at the top of insurance company risk surveys for the past few years. Many insurers integrate climate risk into their enterprise risk management processes. Some make climate scenario disclosures in their reporting. Obvious effects of climate change can relate to property and casualty insurance exposures such as hurricanes and wildfires. Catastrophe modeling is beginning to address the effect of climate change. Other insurance coverages may be directly or indirectly affected by climate change.
Social factors of ESG address how companies treat their employees, suppliers, customers and communities. The “S” in ESG gets at how companies manage the rights and well-being of such stakeholders, both internal and external to their organizations. This includes the health and safety practices affecting employees and the wider communities. Companies may also be concerned with how their vendors and suppliers deal with the community and ESG initiatives.
Governance factors of ESG address how companies conduct their business and encompass leadership, accountability, transparency, decision-making and risk management and mitigation. The “G” in ESG also gets at how companies handle shareholder rights, their compensation practices, advocating/influencing public policy and their reporting completeness and accuracy.
An important element of governance is a company’s Board of Directors. The board is vital to an ethical, effective and independent governance structure. The board’s strategic oversight of the company is crucial. The board can enable open conversations on ESG priorities with critical stakeholders as well as with shareholders. The information it obtains can help identify the ESG areas that are most important and material to the company’s performance and sustainability.
Company reporting is an important aspect of governance. Many companies currently report on at least some ESG information. Some insurers have gone as far as publicly issuing ESG reports, measuring against ESG performance benchmarks. Internal audit functions have become involved in addressing the informational and data requirements of such reporting. Wolters Kluwer, the company behind the TeamMate system used by many insurance regulators, has added ESG modules to its capabilities. ESG reporting is a complex and rapidly evolving process.
Many organizations have become involved in addressing such matters as guiding principles for ESG. For example, the United Nations Global Compact helps companies align their business strategies and activities with sustainable and socially responsible policies and report on implementation. Reporting frameworks include the Sustainability Accounting Standards Board and the Global Reporting Initiative. ESG rating agencies have come into existence which rate companies based on their ESG policies, systems and measures, using multiple sources including company publications and questionnaires.
ESG can be utilized as a set of criteria by investors when evaluating a company. Some may align their investments with ESG values and favor companies which actively address ESG concerns through high ESG standards and performance. Given the significant amounts of investable assets of many insurers, the topic of ESG investing is of interest to insurance company executives and directors. While some insurers do not explicitly address ESG considerations, others have adopted “green” investing strategies.
Insurance companies may face obstacles when trying to develop effective ESG risk management practices and reporting. For example, some may face a financial issue, operating without budgets allocated to ESG. Others may not have systems to control, collect or support ESG metrics. Also, ESG has become a politically divisive topic, with some states having recently enacted anti-ESG laws. This complicates the terrain for insurers.
ESG is not going away, and companies can benefit from numerous aspects of ESG. Embedding ESG into a company’s culture and operations is not simple but can yield benefits. Careful planning and strategic implementation will likely prove worthwhile for insurance companies and their many constituents.
About the Author:
Steve serves as President of Noble Consulting Services, Inc. Steve has over 40 years of experience in the insurance Industry. With Noble, Steve’s emphasis is on insurance company corporate governance and risk-focused financial analysis. Prior to joining Noble, Steve served as Director of Corporate Enterprise Risk Management for a property and casualty insurance group. Steve has over 20 years of experience as a CFO and other senior management roles in the insurance industry. Prior to that, Steve was a Partner with a Big 4 public accounting firm, specializing in serving the insurance industry.
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