Companies that address environmental, social, and governance (ESG) issues well are more likely to increase shareholder value, enhance their reputation and contribute meaningfully to sustainable socio-economic development. With customers demanding ESG fund options and information relating to the social impact of their investments, insurers need to ensure that their products and product disclosures meet this demand and that their practices are ethically sound from an ESG perspective.
Here are three ways in which insurers can unlock long-term business value with ESG in the long run.
In efforts to reap rewards, insurers should disclose and promote their respective ESG agenda and work towards sustainability through their operations. Many insurers are developing risk appetites based on net-zero and carbon reduction pathways.
Incorporating climate-related risks in underwriting and investment policies can facilitate the transition towards a cleaner future. Many insurers intend to stop—or have already stopped—providing insurance and risk management services for polluting businesses. To embed ESG into the underwriting cycle, insurers should recalibrate their risk appetite and determine the risks they are prepared to underwrite.
The impact of ESG variables on product design for both long-term insurance and health care products can be seen. We have seen the introduction of sustainable insurance products from leading Indian life insurers who also have an ESG-focused fund exclusively investing in businesses that are environmentally, socially, and governmentally ethical.
Determining ESG risk appetite
There is a need to determine ESG risk appetite for long-term success. Although there are some areas where traditional insurance coverage addresses ESG event-based incidents, there are many trend-based risks that are emerging within ESG, where insurers need to be more creative in developing solutions to plug a growing protection gap. By assessing which sectors represent the most relevance and risk to the firm, insurers can gain a better understanding of the balance sheet’s sensitivity to changes in major ESG risk factors.
The path ahead
Insurers can pave the way for the industry and show how ESG can become part of strategic frameworks rather than just an act of compliance. The goal should not be to just check all the boxes, but rather to delve into your company’s purpose and create societal value for your core business.