Keeping score of ESG

ESG issues have undoubtedly climbed up the list of key business priorities for (re)insurers. To date, most of the actions taken by the industry have centred around internal operations and meeting regulatory requirements, with a focus on the asset side of the balance sheet.

The next step requires (re)insurers to start thinking about how they can tackle, and indeed benefit from, the incorporation of ESG decision-making across their entire business, including underwriting.

(Re)insurers are well placed to influence real change in corporate behaviour and disclosures in relation to sustainability. They have leverage – with a broad reach across business sectors, substantial capital provisions and large balance sheets, and can invest in the necessary technology and resources to monitor and manage ESG.

An ESG strategy first needs to be developed and this sees (re)insurers carefully considering their priorities, asking big questions about who they really are, what they care about and what they want to achieve with regard to ESG. This all helps to identify and define their sustainability principles.

Once these principles are established, like any business strategy, to achieve success with ESG the chosen approach must be auditable, purposeful and authentic, and it is essential for a (re)insurer to consider their entire business and how to provide consistency across all functional areas, from underwriting to operations, investments to risk. The strategy then turns to potential actions. Metrics will then need to be established, with relevant targets applicable across all functions.

Two core areas where a baseline of ESG performance enables (re)insurers to understand their performance against targets are underwriting and investment portfolios. Representing inflows to the business, as new policies are underwritten or new investments are made, a (re)insurer will need to know the impact these additions will make on their performance, whether positive or negative.

But how can ESG be measured at the single deal level, to then extrapolate up to the portfolio level? This leads to the next challenge – how to source relevant, reliable ESG data for use at a granular level.

One effective approach to get a view of ESG across a business is the use of a Balanced ESG Scorecard. Co-designed with all key stakeholders, and with clear objectives and metrics set out from the start, all stakeholders will define the main risk criteria and underlying data points, to ensure consistency and accountability across all functions of the business – whether it is investment or underwriting. As all stakeholders have been involved from the outset, insurers can be more confident that the ESG strategy will be embedded into the business.

As a new risk factor, ESG brings uncertainty but also creates opportunities for (re)insurers to grow their business. It can be used as another lens through which to view risk selection and risk appetite. If implemented properly, this could open the door for (re)insurers to build a competitive advantage. By evolving an ESG strategy, (re)insurers can give themselves the best possible chance to identify new growth opportunities, differentiate themselves in a crowded market, improve underwriting profitability, and attract new capital in this new market.

The ESG journey is still in a relatively early stage but it is evolving fast. (Re)insurers need to move quickly, but data, methodologies and models already exist to enable progress to be made in incorporating ESG into their whole business, including underwriting decisions. These will evolve, as will the industry and regulatory requirements. But by taking steps now, (re)insurers can position themselves to be resilient and thrive in a fast-changing world.

By Paul McCarney, Moody’s Analytics