The growing importance of ESG
Insurance is all about identifying, understanding, and managing risks. A recent study by the insurer Allianz1 revealed that companies with better ESG (Environmental, Social, and Governance) performance have a lower probability of experiencing incidents such as work-related accidents, reputation-damaging controversies, or being fined by regulators or government bodies. This helps to reduce their risk profile.
So, what exactly is ESG, why is it becoming so important in investments, and how does it help to minimise insurance-related risks?
What is ESG?
ESG stands for Environmental, Social, and Governance. It refers to a set of standards that measure a business's impact on society and the environment and how transparent and accountable its governance is. This includes aspects such as company leadership, executive pay, audits, internal controls, and shareholder rights.
- Environmental measures refer to how a business minimises its environmental impact across its products/services, supply chain, and operations. Good environmental business practices include using renewable energy, developing greener products and services, switching to zero-waste products or sustainable packaging, reducing carbon emissions, and encouraging recycling.
- Social focuses on how a business can impact wider society and workplace cultures. With equality and fairness at its cores, examples of social and ethical business practices include ensuring products are safe and customer data is secure, preventing abuse within the supply chain, such as modern slavery, protecting labour rights, supporting health, safety, and well-being, promoting fair and equal opportunities, and investing in community projects.
- Governance refers to a business’s decision-making and reporting processes, the logistics of running a business, and its ethical behaviour and transparency. This can include accurate reporting on financial performance, business strategy and operation, ensuring business leaders are accountable for risk and performance, ethical practice, and diversity. Good governance particularly appeals to investors, helping your business grow.
The importance of ESG in investments
ESG measures how a company integrates its environmental, social, and governance practices into its operations, business model, impact, and sustainability. This can significantly impact the company’s attractiveness as an investment opportunity. In other words, ESG isn’t just about what a company manufactures or sells but also how it goes about it.
For example, a company’s ESG strategy may demonstrate adapting its manufacturing processes to comply with upcoming environmental legislation. This makes the business a more secure investment for long-term growth and reduces risks, which is beneficial from an insurance perspective. Therefore, ESG considerations can benefit a business from both an investment and an insurance standpoint.
Latest research
According to the CBI2, around two-thirds of investors now consider ESG when making an investment, which means those companies adopting the principles of ESG have greater potential to grow while benefiting the community and the environment. Research by Charles Stanley3, one of the UK’s leading Wealth Managers, found that up to half of investors (48%) are looking to increase ESG investments within the next three years, while research by management consultancy, McKinsey4 found that over 70% of people said they would pay an additional 5% for a green product if it met the same standards as a non-green alternative.
Aligning insurance with ESG
Transparency around ESG (Environmental, Social, and Governance) performance is important when securing business insurance. Insurers are increasingly interested in aligning their business with a positive ESG profile, especially in the current hardening market. This emphasis on information disclosure has led to a clear framework for ESG. Establishing ESG targets, a timeline for future performance, and measurable metrics is critical, particularly as we move towards a carbon-neutral future.
It is essential to show an ESG plan for improvement and how ESG can be built into renewal schedules. In terms of underwriting, new ESG strategies are prompting the introduction of new products, with Lloyds of London taking a leadership role.
Summary
Adopting an ESG framework has many advantages. It helps to lower costs, retain staff, increase customer trust, build resilience, protect against reputational damage, and generate investment. Additionally, it can help reduce risk, which can significantly impact the insurance portfolio.
To discuss your company’s insurance requirements and the importance of ESG to your business and your insurance portfolio, talk to NLIG today. Call us on 01992 703 300 or email us at insurance@nlig.co.uk
Sources
1 commercial.allianz.com: The predictive power of ESG for insurance
2 british-business-bank.co.uk: What is ESG? A guide for businesses
3 charles-stanley.co.uk: How can you become a responsible investor?
4 mckinsey.com: Five ways that ESG creates value
aon.com: ESG – a new lens for investors and insurers
integratechnical.com: ESG and its growing impact on the insurance industry