What is ESG and is it relevant for life insurance?

At the 2022 All-Actuaries Summit, Catherine Robertson-Hodder delivered a presentation describing the challenges and opportunities ESG provides to life insurers and the broader industry.

What is ESG (Environmental, Social and Governance)?

You may have heard of ESG before in other ways – ethical investing, sustainable investing, and impact investing. ESG stands for Environmental, Social and Governance – it is a broad indicator used to evaluate the ability of an organisation in managing its sustainability, ethical, and corporate governance matters and opportunities.

It has swiftly gained materiality and importance for organisations as stakeholders are beginning to demand more from this front, as more and more investors begin to apply these non-financial factors as part of their investment analysis.

From her practical perspective, Catherine boiled it down to this:

“Is it everyone we do, and asking is this the right thing to do?”

Since it is so broad, insurers will often face and prioritise different elements of ESG depending on their appetite and industry focus. The table below showcases examples of some ESG elements:

Environmental

As an insurer, what is the commitment we are making to future generations and the world we live in?

Social

As an insurer, what’s my contribution to the community I operate in?

Governance

How do we conduct ourselves as insurers?

– Climate change

– Energy efficiency

– Land degradation

– Waste management

– Resource depletion

– Customer satisfaction

– Product reliability and ethicality (mis-selling)

– Data protection and privacy

– Diversity and equal opportunities

– Employee safety and engagement

– Ensuring accountability

– Executive
remuneration

– Bribery and corruption

– Regulatory compliance

– Leadership diversity and inclusion


How is ESG measured? O
verseas developments and Australian regulatory activity

A key challenge that we face is quantifying ESG – how do we measure it? There are a myriad of choices and factors to consider. Below is a list of overseas developments to improve ESG reporting and transparency:

Increased disclosures:

  • The Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) to improve climate-related disclosures (2015).

  • The World Economic Forum has partnered with the Big 4 Accounting Firms to identify a set of universal metrics and disclosures – the Stakeholder Capitalism Metrics.

  • COP 26 – A key outcome was the formation of the International Sustainability Standards Board (ISSB) (2021).
    • IFRS and ISSB has recently released two exposure drafts for comment, one for climate-related risk and the other for general sustainability disclosures.

Guidelines and Actions:

  • EU Regulators – scenario analysis (UK), publication of a two-year plan of sustainable finance activities (EU) and ESG guidelines (Germany).

  • Mandated disclosures – NZ in 2023, effective in UK and proposed by US SEC.

  • Principles of Sustainable Insurance (PSI) – an UN-led initiative that provides a guide to addressing key risk management, challenges and opportunities for the life and health insurance industry.

 

In the Australian space, regulators have slowly begun to adopt as well.

APRA:

  • Development of CPG 229: Climate Change Financial Risks.

  • Provides guidance on managing climate change risk and integration into existing strategy, governance, and risk management frameworks.

 

ASIC:

  • Report 593: Climate risk disclosure by Australia’s listed companies.

  • Sets out high-level recommendations regarding the consideration and disclosure of climate risk.

  • Major focus is greenwashing.

How do other stakeholders play a role in driving ESG?

While regulators will drive the minimum, other stakeholders (customers, employees, shareholders) play an important role in setting higher expectations for ESG.

Insights from KPMG Australia’s 2021 CEO outlook survey[1] demonstrates this point and how it aligns with shareholder expectations:

36% struggled to articulate a compelling ESG story.

  • There is a social expectation from shareholders to have a strong ESG strategy.

  • Needs to be achievable (avoid greenwashing) but contain challenging targets.

 

Greenwashing is when a company provides a misleading image on how environmentally friendly their goods and services claim to be.

70% experienced increasing demand for ESG reporting and transparency.

  • Disclosures will evolve over time – ESG ratings will become mainstream and influence shareholder/customer decision-making.

47% believed their ESG programs boosted their financial performance.

  • Strong ESG strategy is likely to become a key consideration for institutional investors.
    • 75% of institutional investors consider ESG factors to be ‘material’ in their investment analysis.

In contrast, ESG also creates opportunities for life insurers to grow, by keeping aligned with the needs of their customers and employees:

Customers are at the core of social consideration.

  • Ensuring equitable and affordable access to insurance.

  • Products that suit customer needs (avoid mis-selling).

ESG is becoming an important consideration in employer choice.

  • Supporting diversity and providing equal opportunities.

  • Employee engagement and ensuring accountable governance and leadership.

  • ESG strategy can play a role in retaining/attracting talent.

 

Brand loyalty is likely to be built by swift adoption of ESG strategy. A Responsible Investment Association Australasia (RIAA) survey found that:

  • 72% of customers are concerned that their financial providers are engaged in greenwashing.

  • 74% would consider moving to another provider if they discovered that their financial services provider invested in companies engaged in activities that did not align with their values.

 

How are businesses transforming to accommodate for ESG?

With the rapid emergence of ESG, organisations including life insurers will need to consider transformations in all areas of the business, including:

C-suite and Board:

  • Expanding the C-suite to contain ESG-related roles.

  • Heightened responsibility for ESG strategy and delivery.

  • Increasing disclosure as required by regulation.

Planning and Strategy:

  • Priority to develop a robust yet achievable ESG strategy.

  • Development of a roadmap for implementation.

Risk Analysis/Mitigation:

  • Current risk processes (Risk Appetite Statement/Risk Management Strategy) expanded to reflect current ESG risks.

  • Performing ESG risk-related scenario analysis.

Data:

  • Development of additional internal and external ESG metrics.

  • Significant additional data will be required to accurately measure ESG.

  • Development of technology for analysis and reporting.

Actuarial implications of ESG

In addition to the broader effects ESG is having on corporations, it also has specific implications for actuarial work in life insurance:

Balance Sheet

Data and Modelling

 – Life expectancy may fluctuate with offsetting factors – e.g. impact of climate on key claim causes, new diseases, reduced pollution, and catastrophe modelling.

 – Fundamental shifts in asset management strategy.

 – Rising cost of compliance – if not compliant, it can lead to loss of customers and reputational damage.

 – Modelling of climate risk to investment portfolio.

– ICAAP and strategy recovery plan – stress and scenario testing regarding emerging ESG risks.

 – Collection of ESG data – to support compliance of asset management with ESG strategy and more broadly.

 


Conclusion

Again, ESG is everything we do. For life insurers in Australia, Catherine’s view is that mandatory reporting is on the horizon, furthering the relevance of ESG. There are opportunities in acting quickly, however there are also challenges and although much broader than actuarial, the inherent nature of ESG and its risks presents a chance for actuaries to get involved and use data for good.

References

  • [1] https://assets.kpmg/content/dam/kpmg/au/pdf/2021/ceo-outlook-2021-australia-infographic.pdf
 

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