Why is ESG so important for insurance companies right now?

"Right size your focus" says risk expert and former Oxford don

Why is ESG so important for insurance companies right now?

Insurance News

By Daniel Wood

Environmental, Social and Governance (ESG) issues have risen to prominence during the last year.

David Howard-Jones (pictured), partner in Oliver Wyman’s Global Finance and Risk practice, said there’s been a dramatic pivot in the degree of interest in ESG across the whole private sector, including in the insurance industry.

“There's certainly been an explosion that I think a lot of people have perceived in the press generally, around ESG, and what firms are doing,” said Howard-Jones, who is also director of Oliver Wyman Australia and holds a Doctor of Philosophy and an MA in Mathematics from the University of Oxford.

Howard-Jones said there’s a political context for this “explosion”: COP26. The climate conference in Glasgow saw significant participation from business leaders and private companies.

The former governor of the Bank of England, Mark Carney, the UN Special Envoy for Climate Action and Finance, assembled the Glasgow Financial Alliance for Net Zero (GFANZ). This group of bankers, insurers and investors committed to put climate change at the centre of their work.

“Mark Carney, at the GFANZ group that he got together in the run up to Glasgow, managed to corral a lot of financial organizations, including insurers and banks globally to sign up to make commitments to sustainability and climate change,” said Howard-Jones.

At the conference, nearly 500 global financial services firms agreed to align $130 trillion – about 40% of the world’s financial assets – with the climate goals set out in the Paris Agreement, including limiting global warming to 1.5 degrees Celsius.

“I think this is getting huge attention in the boardrooms of all corporations now, including insurance firms. Some of it can feel a little bit novel, like, why are we suddenly caring about ESG?”, said Howard-Jones.

He said there are some companies that despite being the object of ongoing criticism have already made significant progress.

“Unilever, for example, for all the critique they still get for palm oil, if you look at the progress they've made on sustainability, it shows that they actually figured out 10 years ago, maybe even before, the importance of business for the long term,” said Howard-Jones.

The former Oxford don said the right approach to ESG is to “right size your focus”.

“It doesn't mean necessarily going overboard, directing huge resources to solve problems which aren't your core purpose of existence,” he said.

Howard-Jones said that would be questionable given insurance companies’ obligations to build shareholder value.

“But I think what companies like that [Unilever] demonstrate is that actually it's a very important part of protecting capital for the long run, to make sure that you have community support, which is much broader than doing what you're allowed to do,” he said.

Howard-Jones said the pressure on insurance companies and other firms to act on ESG issues is not just coming from environmentally motivated class actions.

“I think there's a whole lot of things,” he said.

Howard-Jones said regulations are one impetus.

“For example, if the regulator puts rules on you regarding sweatshop practice overseas, clearly, if you are purely trying to maximize cash profit you would not care about how things were manufactured, you’d find the cheapest product that you could put into your output,” he said.

He said regulations are not the only reason a company would chose not to operate sweatshops.

“I think companies realized a long time ago that [practices like sweat shops] actually builds up a different risk. It actually exposes them to heaps of Whitehaven Coal like issues with investors or activists – there’s a very long list of things,” said Howard-Jones.

In 2020, Whitehaven Coal pleaded guilty to breaching mining laws causing 'significant environmental harm' in NSW.

Howard-Jones said the “massive upswing” in the importance of employee engagement is also playing a role.

“I think that people value working for a firm where they feel like it has purpose, as well as profit, at the heart of what it's doing, which I think is a context that we see play through all sorts of themes in the political sphere right now,” he said.

According to a recent WTW survey, there’s still some way for many companies to go in terms of dealing with ESG issues. The survey of 500 global executives from 250 major companies across 20 countries found that nearly 80% of the respondents were “not fully confident” in their company's reputational and ESG risk readiness.

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