Integration of ESG objectives in the insurance product – What, Why and How

It is therefore of the utmost importance to carefully understand the definition of each component, so that the intent to incorporate ESG features in one’s insurance products is relevant and does not harm the undertaking’s credibility, notably when such integration is driven by the undertaking’s willingness to strategically position itself in the ESG and sustainable finance debate, thus making it a true differentiator. The sustainability of the undertaking itself may be at stake if not properly thought through and executed.

It is even more important when it comes to frameworks in continuous flux, where the definitions of today may not necessarily be true or sufficient tomorrow, or different across geographical locations.

• Under the E, the undertaking will seek the lowest possible impact on the environment (e.g. carbon emission, natural resources, greening of the economy);

• The S will focus on principles centred around the organisation’s human capital, its ecosystem and, more broadly, the impact of the undertaking on society and people overall;

• Finally, the G forefronts topics around the responsibility of undertakings towards their stakeholders including transparent and fair reporting, as well as setting up proper rules and internal organisational and monitoring structures in that respect.

This being said, few will argue that ESG has become an inevitable and central topic for companies, including insurance undertakings, and their management, carried by an ever increasing and unstoppable awareness in public opinion including more eco-conscious younger generations. Events like the pandemic and climate deregulation have all but fuelled the general public appetite for greater commitment, transparency and contribution from economic players to be part of a solution towards more responsible behaviours and investments. As a consequence, the number of stakeholders to manage and answer to when it comes to ESG has  followed the same drastically exponential curve — from customers to employees through NGOs, governments, regulators and agencies — this entails the definition of a proper and genuine ESG identity and strategy, to be able to provide adequate and tailored replies  and products, and thus satisfy specific expectations, sometimes vastly different.

As managers of society’s risks (underwriting EUR 5 trillion in new risks each year) and key institutional investors (with about EUR 30 trillion in assets under management), insurers undoubtedly play a role in facilitating the transition to a more sustainable and resilient economy.

According to the OECD, reducing GhG emissions to net zero by 2050 will require investments of about 2-3 trillion per year to replace or adapt most of the world’s physical capital stock (houses, factories, transport and energy infrastructure…) to either decarbonise our infrastructures or to protect them from the effects of climate change. All these new or adapted assets will have to be financed, insured, and in part relating to their ESG performance.

Sustainable and green insurance products are those that cover the design, creation, production and use of these new assets, products and technologies, or the liability associated with their creation and use, or where certain features promote sustainable or green behaviour. 

Beyond the assets themselves, there will be new markets, new businesses models and new technologies. To name but a few examples:

• Green Property Rebuilding Insurance – “Build Back Better”;

• “Pay as You Drive” Car Insurance/Low Mileage Discounts;

• Customed insurance for hybrid/electric vehicles, reflecting different usage/consumer profiles;

• Insurance for Renewable Energy Property;

• Global Weather Insurance, covering against unpredictable weather conditions and climate change;

• Directors & Officers Insurance;

• Professional Liability Insurance linked to ESG risks.

The inclusion of ESG factors clearly impacts the insurance undertakings at their core including operation and execution. To make it easier to tackle, this requires the development of a systematic approach to keep the overall coherence the undertaking wants to deliver—and be recognised for—as mentioned above. Drilling the E, S and G down into manageable sub-topics/streams/actions is a must.

An illustrative ESG product approach and strategy can be summarised below, from a minimum, undertaking-centred perceptive to a wider more overall-impact oriented ambition:

From the above framework, it is clear that although the natural first avenue of action, the incorporation of ESG affects the undertaking far beyond the mere product’s range, and represents the start of a massive transformation journey, which insurers wants to drive to maximise the effect on their own performance but most of all, on the economy at large.