Insurers and ESG – what difference can they make in Canada?

Insurers and ESG – what difference can they make in Canada? | Insurance Business Canada

Insurers and ESG – what difference can they make in Canada?

The insurance industry has a huge opportunity to influence positive changes around environmental, social, and governance (ESG) issues in Canada.

From an environmental standpoint, insurers are on the front lines in Canada’s battle against climate change. Insurers see the damage and the devastating effects of climate change on Canadian society and the country’s economy - they pay the claims, but they also educate people on how to mitigate and prevent risks.

“Our expert community has a credible voice with the government, regulators, and organizations who’ve set the parameters and the rules of the game,” said Paul Fletcher, chief corporate affairs officer at Aviva Canada. “We’re very active in that as an industry, and I think we do a pretty good job.”

Two areas where insurers “perhaps underestimate” the influence they have around ESG is in their spending and their investing, according to Fletcher.

“At Aviva, we spend roughly $3 billion a year on claims. That means we have a supply chain and a whole bunch of partners who want to work with us,” he said. “We also spend money on running our offices and running our vehicles. These are all partners and suppliers who want our business … and if we set a bar [where] we’re looking for certain standards of governance or [ESG] impact, and we have criteria for making those buying decisions, we have influence and we shouldn’t underestimate it.”

Read next: Aviva Canada CEO: "We have the most ambitious climate targets of any insurer in Canada”

Insurers also have influence through their investment strategies. In recent years, many insurers have increased their asset allocation to green or impact bonds, representing growing interest in sustainable investment practices. Many have also introduced strict new standards around what businesses must achieve, from an ESG standpoint, to be considered for investment. 

“We’re underwriters and underwriting capital is scarce,” Fletcher added. “Companies need our risk protection, and investors want companies that they invest in to have our risk protection. I think it’s only in the last few years that insurers have realized that we have influence and we have power to choose where to deploy our underwriting capital - and it’s been quite acute in a harder market. We are able to use that standard to say: Is this a company that deserves our scarce underwriting capital? How do they qualify for it?

“I suspect that [in a few years] the quality of a company’s reputation and metrics around ESG will probably be an indicator of how good the management is. As underwriters, the quality of management is tough to [quantify]. You know it when you see it, and you definitely know when it’s not there. I’m willing to guess that [ESG] will become an underwriting indicator, and, therefore, it’s a way that we’ll have influence into the future. Are we willing to deploy our underwriting capital to organizations?”

Read more: How can insurers kick off their ESG investment journey?

Bruce Palmer, president & CEO of Pro-Demnity Insurance Company also believes insurers have influence, via underwriting, in how companies manage ESG factors.

He said: “We have to redefine what a good business is. I remember back in the 80s, where a good business person was ruthless and went and grabbed all the products. That’s not good, that’s terrible. We shouldn’t be supporting or empowering that. We should be actually redefining good. Good organizations care about society, they care about the environment, and they actually invest in long-term solutions rather than just short-term profit. And we have all sorts of influence and power to help make that happen.”

As for specific parts of the insurance business – investing, claims, and underwriting – Palmer believes there are many opportunities and levers to influence positive change in society, but he warned that insurers should not be “frivolous” or “reckless” in using their influence. Rather, he said: “I think we should actually work with our communities, and our stakeholders of all types to help make those changes happen.”