The Market's Approach to ESG Must be Strategic, Authentic

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Focus: The Market’s Approach to ESG Must be Strategic, as Well as Authentic | Insurance Day

ESG scores are increasingly influencing the conversations directors and management of risk carriers and brokers are having with investors, regulators and other stakeholders.

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This article was republished with permission from Insurance Day.

By Alex Hindson, Argo Group

In recent years, as share-holders, regulators, credit agencies and employees dedicate growing attention to the societal footprint of corporates, environmental, social and governance (ESG) management has emerged as a key priority for executive teams.

With precious few industry-wide standards and a variety of indices and approaches available, however, navigating the ESG maze has become complex, as well as unavoidable.

Each company faces its own ESG challenges and a one-size-fits-all approach is impossible to implement across the whole of the re/insurance industry. It is, moreover, not just insurers that are at an early stage of this wider, societal move towards sustainability: our clients, too, have grasped the scale of the necessary change and our efforts would be futile if we did not support innovation among both the insurance industry and our insureds.

Increasingly, firms across the board recognise the importance of ESG in managing their reputation and see it as part of their toolkit in differentiating themselves from competitors. An authentic sustainability commitment based on providing targeted risk solutions and a clear and credible sustainability message maintains stakeholder confidence, resonates with existing staff and helps to attract diverse future talent.

ESG scores

Growing awareness of sustainability issues among the investor community has been particularly influential in bringing ESG considerations to the fore. Many rely on external indices or ESG rating
agencies to evaluate progress and achievements. Some of those, like ISS and Sustainalytics (linked to Glass Lewis), have an impact on shareholders by acting as proxy advisers.

Others, such as Morgan Stanley (known as MSCI), are widely used by investors and investment analysts directly. Their ESG scores are starting to influence the conversations directors and management are having with shareholders.

Surprisingly, firms might one day realise they already have an ESG score they are unaware of. If they have not previously focused on ESG indices, their scores might be less than flattering because they are based only on what has been disclosed publicly, rather than what actually has been achieved. It is, therefore, critical to gain an understanding of the various scoring systems and then seek to influence these by a co-ordinated effort to disclose through annual reports, websites and other reporting. For example, the Sustainalytics score for Argo increased dramatically within six months – simply through disclosure of our pre-existing activity.

It is also important to look carefully at how an index or measurement rating is produced. Some issue a standardised questionnaire, which may have questions irrelevant to a particular sector, some issue a single score, while others segment and split out their scores. The MSCI for re/insurance, for example, is weighted 60% to social compared to 20% each for environmental and governance factors. Moreover, the definition of each category will vary; “social” can, for example, include human rights, data protection and responsible investment, depending on which index you use.

While external pressure from investors and regulators is increasing, committed board sponsorship is essential to embed an ESG strategy across an organisation. The board is the natural supervisor. of governance and strategy, but also the custodian of the organisation’s culture, values and reputation. It may be more attuned to stakeholder perceptions and concerns in some cases than executive management, because directors have the required distance from day-to-day

In addition, execution of a successful ESG strategy requires employee engagement and passion. Management needs to set the overall framework and provide the required tools but also to inspire staff involvement to achieve success. One recognised approach is to empower employee resource groups that enable passionate individuals within the business to volunteer their expertise and abilities.

With ESG strategies covering a range of topics, companies must decide on a tactical focus. The UN Sustainable Development Goals consist of 17 measurable targets, all of which are broken down into numerous specific measures. Only the very largest firms have the capacity and wherewithal to address all of these. Companies need to prioritise.

Across the re/insurance market, some commonly identified issues include climate change, trust in the industry, underwriting sustainability, diversity and inclusion, protecting customer data privacy, responsible investments and use of technology and modernisation. But again, priorities will vary according to each firm.

Embedding change

However committed your board, management and staff are, any efforts by individual companies will fail if they do not involve the broader industry. This partnership must be broad, involving brokers, insurers and policyholders. ClimateWise, an industry body focused on advancing climate risk awareness and solutions – now aligned to the G20 Taskforce on Climate-related Financial Disclosures (TCFD) – is one valuable initiative that seeks to achieve just that.

Companies can also sign up to the UN Principles for Responsible Investment, and there is a specific ESG group within the Lloyd’s Market Association to work collaboratively with peers across the London market.

These initiatives give us a greater ability together to influence the wider agenda than we could hope to do alone. Moreover, these commitments are not only opportunities to demonstrate continuous improvement to investors and regulators, but also appeal to your staff’s pride in their workplace and to potential recruits.

There are always risks when implementing an ESG strategy. Moving too fast without a clear direction and board and executive management buy-in is simply setting the business up for failure.

“Greenwashing” – when organisations are tempted to make high level and non-specific commitments to grab headlines but do not commit sufficiently in depth or implement and drive forward a genuine programme of change – is also a concern. The gap between statements and reality will be uncovered and cause significant reputational damage.

But the fact is ESG is coming, whether your organisation is ready or not. Indeed, it is already here.

The impact of #MeToo, Climate Emergency and Black Lives Matter on business plans and corporate reputations has made this clear. These are powerful movements and businesses will need to address the need for change highlighted by these and other movements.

Failure will have consequences: the Bloomberg News article looking at the culture at Lloyd’s in 2019 highlighted what happens when legitimate concerns are ignored.

There are no easy answers. Addressing sustainability and the climate challenge resembles risk management. The principles are clear, but there are no off-the-shelf answers for implementation. Each organisation needs to grasp the subject and make it their own.

Fundamentally, it comes down to what sustainability means to you and your stakeholders. There is no one correct path: it is about being open and incorporating ESG principles into your company governance – making it part of the ethic and culture of your business.

Alex Hindson is chief risk and sustainability officer at Argo Group.

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