The growing importance of ESG
Insurance is all about identifying, understanding and managing risks. A recent study by insurer, Allianz1, revealed that the better a company’s ESG performance, the lower the probability of it experiencing incidents such as work-related accidents, reputation-damaging controversies or being fined by regulators or government bodies, thereby helping to reduce its risk profile.
So, what exactly is ESG, why is it becoming so important in investments and how does it help to minimise insurance-related risks?
What is ESG?
ESG stands for Environmental, Social and Governance and refers to a set of standards that measure a business’s impact on society and the environment and how transparent and accountable its governance is, in terms of company leadership, executive pay, audits, internal controls and shareholder rights. This includes:
- Environmental measures how the business minimises its environmental impact and covers its products/services, supply chain and operations. Examples of good environmental business practices include using renewable energy, developing greener products and services, switching to zero-waste products or sustainable packaging, reducing carbon emissions and encouraging recycling.
- Social focuses on how a business impacts the wider society and workplace cultures. With equality and fairness at its heart, examples of social and ethical business practices include ensuring products are safe and customer data is secure, preventing abuse within the supply chain, such as modern slavery, and protecting labour rights, supporting health, safety and wellbeing, promoting fair and equal opportunities, and investing in community projects.
- Governance refers to a business’s decision-making and reporting processes, the logistics of running a business and its ethical behaviour and transparency. This can include accurate reporting on financial performance, business strategy and operation, ensuring business leaders are accountable for risk and performance, ethical practice and ensuring diversity. Good governance particularly appeals to investors, helping your business to grow.
The importance of ESG in investments
ESG measures how a company integrates its environmental, social, and governance practices into its operations, business model, impact, and sustainability. This can have a huge impact on the company’s attractiveness as an investment opportunity. In other words, ESG isn’t just about what a company manufactures or sells but how it goes about it.
For example, a company’s ESG strategy may show it is adapting its manufacturing processes to meet incoming environmental legislation, not only making the business a sounder bet for long-term growth but also reducing risks, which is good from an insurance point of view. So, ESG can be good for a business from both an investment and an insurance point of view.
Latest research
According to the CBI2, around two thirds of investors now take ESG into consideration when making an investment, which means those companies adopting the principles of ESG have greater potential to grow, while benefiting the community and the environment. Research by Charles Stanley3, one of the UK’s leading Wealth Managers, found that up to half of investors (48%) are looking to increase ESG investments within the next three years, while research by management consultancy, McKinsey4 found that over 70% of people said they would pay an additional 5% for a green product if it met the same standards as a non-green alternative.
Aligning insurance with ESG
Transparency around ESG performance is becoming an important factor when it comes to securing business insurance, with insurers increasingly interested in aligning their business with a positive ESG profile. The hardening market has put more emphasis on information disclosure, and ESG provides a clear framework for this.
Establishing ESG targets, a timeline for future performance and measurable metrics is critical, particularly as we move towards a carbon-neutral future. It’s important to be able to show an ESG plan for improvement and how ESG can be built into renewal schedules. In terms of underwriting, new ESG strategies are prompting the introduction of new products, with Lloyds of London taking a leadership role.
Summary
Adopting an ESG framework has many advantages, helping to lower costs, retain staff, increase customer trust, build resilience, protect against reputational damage and generate investment. It can also help to reduce risk, which can have a big impact on the insurance portfolio.
To discuss your company’s insurance requirements and the importance of ESG to your business and your insurance portfolio, talk to TMD today. Call us on 01992 703 000 or email us at insurance@mcdonaghs.co.uk
Sources
1 commercial.allianz.com: The predictive power of ESG for insurance
2 british-business-bank.co.uk: What is ESG? A guide for businesses
3 charles-stanley.co.uk: How can you become a responsible investor?
4 mckinsey.com: Five ways that ESG creates value
aon.com: ESG – a new lens for investors and insurers
integratechnical.com: ESG and its growing impact on the insurance industry