Pacesetter Research: The Insurance Industry Creating ESG Opportunities from Risks

ESG (environmental, social, governance) has developed into a global initiative for many business leaders, regulators, insurers, activist groups, and the general public, causing its popularity to be reflected in the abundant number of professional services providers specializing in ESG. Needless to say, this growth in ESG can also be largely attributed to the ongoing rise in regulatory changes in ESG, such as the SEC now requiring all public companies in the US to disclose information that may be material to investors, including data on ESG-related risks. While in the UK, ESG reporting is now required for publicly listed companies whose annual turnover exceeds £500 million or have over 500 employees. Some other countries, such as the Philippines, Singapore, and Malaysia, have similarly implemented ESG disclosure requirements. This increase in ESG regulations, coupled with stakeholder pressure, poor uniform reporting standards and metrics, and anti-ESG supporters criticizing the lack of evidence to support a return on investment (ROI), have left some business leaders drowning in confusion. However, despite the criticisms and frustration surrounding ESG, some research is beginning to indicate that there is a correlation between ESG and financial performance. For example, a study between Bain and EcoVadis found that companies that scored highest on the S component of ESG had higher executive team representation for women on average and the firms which excelled in this regard also tended to have better financial results. These findings have led some organizations to realize that in order to remain competitive, at least for the time being, integrating ESG into their overall business goals is an absolute necessity.

Some professional services providers have met this challenge and evolved their ESG expertise from a compliance-driven approach to a strategic one that helps clients align ESG initiatives to their organizational goals. Fundamental to developing a strategic approach to ESG is the ability to use data to develop strategic frameworks, mitigate risk, meet rising consumer expectations, and optimize business performance. The insurance industry, inherently risk-averse, has a unique competitive advantage, given the plethora of data they have accumulated, specifically related to the environmental aspect of ESG, such as tracking claims related to climate events. However, with the exception of a few insurance providers, the insurance industry has been unable to leverage data and analytics effectively. It has typically lagged behind other professional services providers, inhibiting them from offering a proactive approach to ESG.