Insurance CEOs are also engaging their chief financial officers on sustainability at a higher rate of 55%, compared to their business peers at47%, as it becomes increasingly clear that environmental, social and governance (ESG) frameworks are no longer optional.
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“Investors and entities have become increasingly interested in ESG. There are some ESG-specific funds now that will only invest in those companies. And you can debate whether those funds are doing the right thing or not, but you cannot debate that it has a huge financial impact on companies around the world,” IBM’s global general manager for insurance, Mark McLaughlin (pictured), told Insurance Business.
The 2016 Paris agreement was a watershed moment for climate action, triggering a global surge in corporate and government policies to protect the environment. The pandemic also exposed glaring social inequalities around class, gender, race, and sexual orientation. Stakeholders are pushing on the pedals for ESG engines to run, and insurers can no longer sit in the back seat.
Another factor spurring insurers into embracing ESG is public perception. McLaughlin said the industry is among the biggest spenders in terms of branding, with some organizations shelling out billions to boost their image.
“If insurers are not perceived as environmentally conscious, if they are not perceived as on board with social justice trends, if they are not perceived as having good governance over those issues, their brand is at risk. I think this is the biggest driver for insurers aside from the investment issue,” he said.
But far from ESG becoming a vanity project, for the insurance industry, its unique position in the sustainability movement should also be intrinsically motivating.
McLaughlin explained: “Insurers are in a position where we manage risk for a living, and environmental and social justice concerns are big risk drivers too. We can not only make our own firms more sustainable, more environmentally conscious, more socially conscious, but we can ensure through our insurance products that we can get all the other industries on board.”
Unclear ROIs, slow tech drag progress
There are still significant barriers inhibiting CEOs from weaving sustainability into their agenda, including lack of clarity on how ESG policies can affect their bottom line.
Across the IBM study, CEOs said their biggest fear is unclear return on investments. But McLaughlin pointed out that this shouldn’t be an issue for insurance CEOs.
“In insurance, that’s actually an easier conversation [to have], because if there is risk in these areas, we are positioned to build products and services that might help. You help companies avoid or reduce those risks and make some money while you’re doing that.”
For insurers, integrating ESG within the core business and operations means pivoting their underwriting, investing and risk management strategies, and developing tailored ESG products and services. But slow adoption processes and dated technology are dragging that transformation, McLaughlin said.
“I don’t know that I’ve ever come across a person in insurance who has said: ‘I’d like to roll out my products more deliberately,’” he noted with a chuckle. “They want to move faster. The limiter tends to be the underlying technology, and the speed with which it can build new products that can address sustainability concerns.”
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Working with regulators
Regulators are another piece in the sustainability puzzle for insurers. According to the IBM study, regulatory concerns are the top external factor, cited by 58% of insurance CEOs, that will impact their enterprise over the next 2-3 years.
How can CEOs address regulatory pressures on top of stakeholder demands? The answer to that, McLaughlin said, is to lean in and collaborate.
“When regulators in the United States [tell insurance companies]: ‘Hey, we want some evidence that you are managing climate impact in your portfolio,’ the result of that will inevitably be that the industry will attempt to make poor environmental practices more expensive from a risk standpoint. Because you run the risk of investor revolts, litigation, environmentally-based lawsuits, or environmental regulatory changes,” McLaughlin explained.
“Those businesses that are not building ESG are in fact riskier. If the industry prices that risk appropriately, it will encourage not just insurance, but all industries to be more responsible.”
Therein lies the opportunity for insurers to partner with regulators and stakeholders to drive down bad practices through a combination of management and financial incentives.
McLaughlin said the conversation should strive for compromise: “We have figure out how to work with politicians to manage those changes in ways that encourage sustainability, while not being completely oblivious to the fact that if you raise insurance rates 30%, you price out a lot of the market.”
‘Insurers can be a force for good’
ESG considerations, amid an already complex economic environment, can seem like a minefield of risk. But insurers are uniquely positioned to be a force for good, McLaughlin told Insurance Business.
“Our industry’s biggest opportunity is managing our investments to encourage sustainable practice. There is no other industry that can work with these companies to help them improve their environmental practice, to encourage that reduction of environmental impact through risk premiums and products,” he stressed.
“A third of CEOs in our industry are already trying to drive those sorts of products with business partners. I think that number is going to be double in a couple of years.”