As global expectations increase around environmental, social, and governance (ESG) reporting, insurance organizations are assessing the wide range of impacts and opportunities it brings to their industry. Some organizations have started down the ESG path with voluntary disclosures, others are actively investigating how to tailor a program, while others remain on the sidelines awaiting further clarity from regulators.
What is ESG — and why does it matter?
ESG reporting is rooted in concerns around climate change, social equity, and organizational governance. The environment pillar often includes topics around greenhouse gas emissions, air quality, waste, and energy management. Social disclosures typically include areas such as diversity, equity, and inclusion, labor relations, customer privacy, and access to and affordability of products. Governance frequently takes into consideration topics around ethics and integrity, board composition, public policy, and regulatory compliance. These are a small sample of the range of disclosures that could be considered.
ESG reporting relies heavily on opinions and input from stakeholder groups closely related to the organization’s operations, who strongly impact the types of disclosures an organization will pursue. In the insurance industry, the stakeholder group may include customers, suppliers, communities, regulatory agencies, investors, current and prospective staff, management, and others. The stakeholder list may also include wider business relationships. For example, rating agencies such as AM Best has incorporated components of ESG into ratings of financial strength and credit quality through catastrophic stress tests and assessments of organizational enterprise risk management. ESG is also becoming increasingly important to finance and business partners who are collecting ESG data to include in their own disclosures.
ESG disclosures are currently voluntary, but in recognition of increasing stakeholder concerns and the fact that mandatory disclosures could soon be on the way, some insurance companies are choosing to get ahead of it and start their ESG programs now.
Suggested ESG topics for insurance companies
Among the challenges insurance organizations face when starting an ESG program, one of the more significant is — simply put — deciding what to disclose. The National Association of Insurance Commissioners (NAIC) hasn’t indicated it will be a leader in regulation or guidance for ESG disclosures, and to date, the NAIC Task Force hasn’t made a recommendation on rating metrics or material topics. Similarly, while ESG has started to make its way into credit rating activities, there’s no consistent approach from credit rating agencies in how they incorporate or consider ESG factors.
So what topics should you consider when starting an ESG program today? A good place to start is the Sustainability Accounting Standards Board (SASB) detailed guidance for insurance organizations around sustainability disclosure topics and accounting metrics. SASB topics material to insurance organizations include:
- Policies designed to incentivize responsible behavior: Quantitative disclosure measures could include net premiums written related to energy efficiency and low carbon technology. Qualitative measures could include a discussion of products that incentivize health, safety, and environmentally responsible actions and behavior. For example, do homeowner policies have incentives for implementing emission-reducing appliances? Has your organization underwritten sustainable projects and renewable infrastructure? If so, what’s the impact of reduced carbon emissions of these projects?
- Transparent information and fair advice for customers: Metrics could include your organization’s complaints-to-claims ratio, consumer retention rate, and the total amount of monetary losses as a result of legal proceedings associated with marketing insurance products to customers.
- Environmental risk exposure: This topic could include accounting metrics such as the probable maximum loss of insured products from weather-related natural catastrophes. Qualitative measures could include an analysis of environmental risks when it comes to underwriting products along with your organization’s management of firm-level risks and capital adequacy.
- Investment management: Metrics to consider could include total invested assets and a qualitative analysis of your organization’s approach to incorporating ESG factors in its investment strategies. Has your organization reduced its investment in heavy carbon emitters? And what’s its global exposure to companies with high carbon emissions?
- Systemic risk management: Accounting metrics to consider could include the total fair value of collateral assets in securities lending and level of exposure to derivative investments. Discussion and qualitative aspects could include a description of your approach to managing capital and liquidity-related risks associated with noninsurance activities. You could also detail how your organization assesses its exposure to ESG risks within the credit, investment, and political risk portfolio, business model, and client relationships.
While the above topics are a small example of what SASB considers material to the insurance industry, it’s important to consider your organization’s key stakeholders and what they deem to be material. Remember, “materiality” from an ESG perspective doesn’t just consider topics that impact financial performance; it also encompasses impacts on the economy, environment, and people. On the people side, it’s important to engage and incentivize your workforce to contribute to the organization’s ESG mission and objectives. This often helps establish an internal culture of innovation where staff are encouraged to continuously improve operations and services to further the organization’s ESG objectives and benefit the community.
Implementing your ESG program
So, your organization has decided to implement an ESG program. Where do you start? We recommend making smaller incremental steps, gain clarity, and develop your reporting capabilities over time. Identify your stakeholders, understand their expectations, and choose the reporting topics that align with your organization’s strategies and goals.
Next, evaluate any actions that your organization has already taken and go after the “low-hanging fruit.” Follow up with incremental improvements until a robust ESG program is in place. It can easily take over a year to get a program off the ground because your organization may opt to track key metrics for at least a year before reporting on them.
Use this checklist of best practices to kickstart your ESG program.
- Define your organization’s goals for ESG reporting
- Identify your stakeholders for your ESG disclosures
- Determine what ESG topics are material to your organization
- Track and monitor the necessary data
- Determine how and when to disseminate your ESG disclosures
- Set targets and goals
- Monitor progress
- Showcase improvement
To learn more about starting an ESG program, read our article, “ESG reporting: Seven steps to get started.”
In summary
ESG programs in the insurance industry are in their infancy. Organizations would be well advised to get in a position where they’re ready to report on ESG topics, should it eventually be required. Organizations that embrace ESG and start their programs now are poised to better identify their impacts and opportunities, minimize future risk, be eyed more favorably in the community, and be considered by future staff as a desirable place to work.
