Yes, ESG is big deal to insurers too

The role that allocators of capital play in achieving environmental, social and governance (ESG) outcomes is well-documented; but the focus of this commentary is usually skewed towards asset managers’ perspectives. As evidence, consider that this writer has attended countless asset management presentations during which the flow of cash to so-called ‘green’ funds has been extolled alongside the myriad initiatives that fund managers are taking to ensure that their funds measure up to one or other of the industry’s ESG rankings. Far less time has been spent on assessing how life and non-life insurers integrate ESG into their investing and operational practices.

Living up to their mandate

Thankfully, Thabiso Rulashe, Strategic and Market Intelligence Manager at Santam, has taken the time to turn the spotlight on non-life insurers’ ESG approach. He says that although ESG and ESG-led practices remain “in their infancy” among non-life insurers, there are strong strides being made in addressing such shortcomings. While there is still much work to be done, Rulashe believes that embedding ESG within the business is non-negotiable if insurers hope to meet their mandate of making a meaningful contribution in people’s lives. At present, the focus is on embedding a strong ESG framework and agenda in tandem with other industry stakeholders, most notably the regulator and reinsurers. 

The management of risk has always been a cornerstone of insurance. “Insurers have always viewed strong governance as key part of understanding and pricing of risk; managing stakeholders’ expectations has and continues to be a key element in doing business,” says Rulashe. However, in the last two years to June 2022, COVID-19 and the 2021 United Nations Climate Change Conference (COP26) really brought ESG to the fore, accelerating business’ approaches to people management, climate change and regulatory requirements, among other factors. “In some ways the insurance industry is quite advanced, but in others the industry is in its infancy, especially its response to climate change and biodiversity loss,” he says. There is plenty of work to do to form a better understanding of the environmental component of ESG. 

Adopting a balanced approach

In South Africa, where the broader ESG landscape is in its elementary stages, Rulashe says a balanced approach is best. Some choices are obvious: For example, taking a business off the books that participate in criminal activities. Other aspects are far less obvious, for example, when considering whether to exclude companies that deal in fossil fuels. “It is difficult to say you will not support companies [in the fossil fuels space] because South Africa is in dire need of energy … by excluding fossil fuel producers, you risk jeopardising both the economy and people’s lives and livelihoods,” he says. “It is important that insurers take a measured approach: we are risk managers at heart, so [our focus] should be on guiding clients on their journeys to improved risk behaviours”. 

ESG oversights can lead to long-term profit and valuation erosion, among other challenges. Rulashe points out that ESG-related impacts also pose risks in areas such as reputation, talent retention and finances. For example, a lack of governance within an organisation may be indicative that it does not treat the environmental and social aspects with due care either. “In an age where employees want to work for businesses that take care of society and the environment, this could mean top talent chooses other opportunities,” he says. Another point worth considering is that ESG-focused companies can benefit from better pricing “Behaviour that results in a holistic view of risk, and delivers improvements in risk management outcomes, should be incentivised; we are not there yet, but maybe one day hybrid car manufacturers and eco-efficient building developers could receive cheaper premiums,” Rulashe says. 

Insureds adaptations to the COVID-19 lockdown period provide another example. It was a time during which many insureds did not drive a lot and were able to apply for reduced premiums. Their risk reduced and so did their carbon emissions, and their premiums reflected these changes. 

The four ways to champion ESG

There are four ways in which ESG-led practices can be incorporated within non-life insurers’ operating models. 

1. Be ultra-transparent about ESG: Insurers need to report accurately to their stakeholders on the impact of ESG on their performance and other related aspects.
2. ESG must be led from the top: Business leaders must take accountability for implementing and driving strong risk management strategies aligned to positive ESG outcomes.
3. The approach to ESG should be independent: Ideally, ESG management requires independent oversight from board members. With strict, sometimes quite cumbersome regulatory requirements, it makes sense to have a dedicated person and team driving the agenda. Going forward, ESG outcomes will likely be audited, receiving the same level of scrutiny as an organisation’s financial data. It must be taken seriously!
4. ESG should be part of the culture: Board and management teams need to show diversity, disclose remuneration, and how votes happen. Any unethical behaviour must be dealt with swiftly and decisively across the whole value chain, including suppliers. 

In addition, insurers need to fully appreciate the evolving nature of the ESG risk landscape. “Insurers have a meaningful, influential role to play in championing ESG; part of this means making some big decisions about whether to participate in certain key risks,” continues Rulashe. For example, a business can make the call to exclude any organisation involved in human rights violations or environmental degradation. On a more positive note, insurers can take proactive steps to include organisations that are ESG-led, and accelerate renewable energy adoption, for example. The trick is to operationalise ESG. 

Creativity will drive affordability, accessibility

Insurers need to be creative and innovative to come up with solutions that make policies more accessible and affordable. “ESG, ultimately, should be a great thing for insurance [and insurers], because it enhances the societal and risk management role moving forward,” concludes Rulashe. “We are proud to be driving ESG at every level of our business, starting with our Partnership for Risk and Resilience, which promotes disaster preparedness in vulnerable municipalities, to our internal employee value proposition and governance structures … ESG is an integral part of doing insurance, good and proper”. 

Writer’s thoughts:
This ESG-focused newsletter neglects to mention that global reinsurers are leading the way insofar influencing environmental and social decision making across the insurance value chain. These firms are intent on leveraging their financial ‘clout’ to drive the net-zero carbon emissions narrative. How will SA-based non-life insurers maintain the balance between environmental and social factors when reinsurers refuse to underwrite risks associated with fossil fuel and other ‘dirty’ industries? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.