Why ESG is crucial for insurers’ sustainability reporting

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The insurance sector plays a crucial role in transitioning to a greener, more sustainable future. Through their claims, underwriting, asset management and procurement functions, insurers can influence players in the real economy and customers to adopt more sustainable practices.

Climate change poses a threat to insurers’ solvency, as the physical damage caused by catastrophic weather events is making claims more prominent.

Climate change-related risks, such as extreme weather events, rising sea levels, and wildfires, can significantly impact insurers’ underwriting, pricing, and investment decisions.

Consequently, insurers may adjust their risk models to account for these environmental risks and develop products that incentivise policyholders to adopt environmentally sustainable practices.

Furthermore, social factors, such as demographic trends, social inequalities, and customer preferences, are also shaping the insurance industry. Insurers are paying closer attention to the social impact of their underwriting and investment activities, ensuring alignment with ethical standards and societal values.

Strong governance practices are essential for insurance companies to manage risks effectively, ensure compliance with regulations, and maintain the trust of stakeholders. ESG considerations play a crucial role in governance, as they help insurers demonstrate transparency, accountability, and ethical leadership.

Insurers may integrate ESG criteria into their corporate governance frameworks, including board oversight, risk management processes, and executive compensation structures.

The UAE’s Sustainable Finance Working Group, which is chaired by Abu Dhabi Global Market (ADGM), published a second statement about ESG disclosure regulations in the country and directed firms to consider climate change in their risk management and corporate governance practices. ADGM’s proposed regulatory framework will help the firm become carbon neutral and contribute to the UAE’s net-zero goals.

As consumer demand for sustainability grows, the insurance sector is increasing its visibility of ESG reporting to regulators to ensure its alignment with customers’ expectations. This will foster greater resilience, earn consumer trust and help them grow sustainably. Integrating ESG considerations will enable insurers to balance material risks and have greater social credibility.

It is also pivotal to advance toward a cleaner future. Numerous insurers are halting, or have already halted, insurance and risk management services for polluting businesses. To embed Environmental, Social, and Governance (ESG) principles into the underwriting cycle, insurers must reassess their risk appetite and define the types of risks they are willing to underwrite.

Despite the challenges posed by climate change, insurance companies have opportunities to innovate and develop new products and services.

For example, insurers may offer parametric insurance solutions that provide rapid payouts based on predefined weather triggers, helping policyholders recover more quickly from weather-related losses. Insurers can also promote resilience and adaptation measures to mitigate the impacts of climate change on communities and infrastructure.

A key challenge is disclosing the correct information for insurance organisations that are already developing their ESG disclosures, as the metrics used are likely to have evolved over the last few years to meet the demands of various voluntary sustainability reporting frameworks, such as those from the Sustainability Accounting Standards Board and the Global Reporting Initiative, as well as the varying requests for information from sustainability rating agencies.

Insurers also face significant challenges related to climate change, impacting both value creation and emissions reporting. Insurance and specialised sustainability syndicates have emerged to address climate-related risks, while pricing and reserving for electric vehicles and solar-powered homes require new assumptions and data.

Sustainability reporting is about delivering progress towards your forward-looking ambitions and targets across each ESG topic. Forward obligations are just as important to stakeholders and rating agencies. Embedding sustainability targets into robust performance management will likely be crucial to success.

The financial performance management framework typically requires an extension to cover ESG targets, including short-term and long-term planning, forecasting and management information to drive business actions.