Environmental, Social, and Governance (ESG) and Sustainability in Insurance

Environmental, Social, and Governance (ESG) and Sustainability in Insurance

By Enock Rukarwa

Traditionally, the primary concern of investors has been the level of returns provided by an investment, with general ambivalence towards how those returns have been generated.

Now, the Insurance industry is seeing a drive towards responsibility in its stewardship of investor money, with investors seeking to understand how their savings are being invested.

ESG investing is used to screen investments grounded in corporate guidelines and to encourage companies to act responsibly. Across the globe, brokerage firms, mutual funds, and investment apps now offer investment products that employ ESG principles. This is in response to a gradual change in investor philosophy, wherein they are now ESG conscious.

Ethical or responsible investing is not a new development, with many asset managers offering funds or investments under various guises: responsible, ethical, sustainable, socially cognizant, or impact investing are terms that you may have seen almost interchangeably in many investment themes.

A set of standards has developed in the Insurance industry to evaluate how companies operate with respect to the world around them, the people they deal with, and whether they govern themselves in a responsible manner.

These are termed ESG, for environmental, social, and governance.

The environmental factor within ESG is arguably the most tangible. Climate change and greenhouse gas emissions dominate the headlines, but this category also includes energy efficiency, resource depletion (including water), hazardous waste, pollution, deforestation, wildlife preservation, and wider green initiatives.

From a regulatory standpoint, a lot of work is underway to quantify the financial risks due to climate change.

In the insurance sector, firms face challenges around climate change exposures and aligning underwriting strategies, which may require exiting some portfolios.

Insurance firms must also review their investment portfolios to ensure ‘green’ investments wherever possible. This will undoubtedly impact the firm’s financial risks.

The significance of environmental, social, and governance (ESG) factors in insurers’ underwriting business and investment portfolios is increasingly under the spotlight. This is the result of growing awareness of climate-related risks and their potentially devastating effects on society.

During the 2021/22 agricultural season, Start Network embarked on an innovative insurance policy in partnership with African Risk Capacity (ARC) and the Government of Zimbabwe. The policy was to protect more than 800,000 people in Zimbabwe from drought risk during the agricultural season. Such initiatives, if pursued religiously and consistently, will go a long way in addressing climate change-related risks and even mitigating the associated risks.

ESG considerations are specifically important in Africa given that many countries on the continent are highly vulnerable to climate-related risk. Drastic climate change has knock-on effects within African economies that impact poverty, food security, and economic development.

African insurers typically do not yet fully consider ESG risks in underwriting, capital management, and risk management decisions. This is largely driven by a lack of regulation, policy, and voluntary initiatives to regulate and monitor ESG adoption by the insurance sector.

The insurance sector in Africa is very exposed to economic sectors and corporate clients with high levels of environmental, social, and governance (ESG) risk. Most of the large infrastructure projects in Africa, which typically carry significant ESG challenges, require insurance.

However, ESG risks are generally not considered during underwriting, capital management, or risk management decisions by insurers.

The interest, activity, and commitment of the African insurance sector to proactively address ESG issues and to engage within and outside the sector with experts, policymakers, and businesses are currently minimal.

The African insurance sector is not contributing to or influencing ongoing discussions on the integration of ESG issues in underwriting or asset management. Regulators and supervisors contribute to this by not requiring insurers to consider ESG issues.

The important role of insurance companies and regulators in driving global sustainability agendas has led to an increase in expectations of this sector with respect to responsible business conduct.

Regulators and supervisors in Zimbabwe, hence IPEC et al., need to improve their capabilities to identify, monitor, assess, and contribute to the identification, reporting, and mitigation of ESG risks in and through the insurance sector. Sustainability reporting, disclosures, and commentary on the portion of business that impacts climate risk and social ills will go a long way in fostering the ESG agenda.

ESG principles can lead to sustainable business by incorporating toolkits that guide the business in the context of the environment. This will ensure that insurance business is carried out responsibly.(iczemag)