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The Big Picture: ESG is now part of the insurance world

Companies worldwide are shifting toward environmental, social and governance (ESG) in an effort to become more ethical and environmentally accountable, and more attractive to investors and consumers. ESG provides the criteria to measure a company’s resilience to economic, social and governance risks, understanding what the short and long term financial implications will be. While interest in ESG has been growing for the last few years the pandemic has accelerated this focus and the transition is gathering momentum.

As told to Bloomberg, Daniel Ender, a credit analyst at Actiam NV, which oversees 57.2 billion euros, said: “Most companies are moving into the direction of making their capital structures more sustainable. Investors are looking more closely into sustainability in their investment decisions and corporates who show they are committed to changing their business model to be more sustainable and future proof are favored.”

ESG essentially provides a framework for the board to identify opportunities as well as mitigate risk, or in the case of investors to screen potential investments, considering the company’s behaviour and assets. At the moment there is no set criteria but generally the environment criteria will consider the climate risk of the company, from how the business is operated as well as their own assets and investments. S&P Global Ratings’ research estimates that 60% of S&P 500 companies own assets at a “high risk” from the physical impact of climate change.  Social criteria will consider the behaviour of the company, taking into account human rights, diversity and inclusion in the workplace, health and safety, and wellbeing. Workplace and community disputes and protests can negatively impact an organisation’s scoring. Governance criteria looks at a company’s decision making, looking at both internal and external factors, from a country’s policymaking to the corporation’s purpose, the role and diversity of the board and other decision makers, pay and compensation, as well as stakeholders and shareholders.

While at present there are no industry-wide set of common standards, a report by Morningstar earlier this year found most ESG funds outperform the wider market. Companies with a good ESG rating will be seen as less risky, with greater long term resilience and better risk management performance. As part of this, ESG indicators and compliance will be taken into account as part of the insurance framework, providing a useful criteria for understanding insurance risk and understanding whether companies have appropriate measures in place to mitigate the risk.