ESG in the insurance industry is in its infancy

The insurance industry is still in its infancy when it comes to most environmental, social and governance (ESG) concerns says Thabiso Rulashe, Strategic & Market Intelligence Manager at Santam. While there’s much work to be done, he believes the two are a marriage made to last for insurance to meet its mandate to make a meaningful contribution in people’s lives. Right now, it’s about embedding a strong ESG framework and agenda, and working with all stakeholders, in particular the regulator and reinsurers.

He stresses that management of risk has always been a cornerstone of insurance. “Insurers have always viewed strong governance as key part of understanding and pricing of risk. Managing stakeholders’ expectations has and continues to be a key element in doing business.”. However, in the last 24 months, Covid-19 and the 2021 United Nations Climate Change Conference (COP26) really brought ESG to the fore (accelerated), especially in terms of people management, climate change and regulatory requirements.

“In some ways the insurance industry is quite advanced, but in others the industry is in its infancy – especially in terms of its response to climate change and biodiversity loss. There’s a lot of understanding that needs to come around the ‘E’ of ESG, especially.”

In South Africa, where the broader ESG landscape is in its elementary stages, Rulashe says a balanced approach is best. Some choices are obvious – for example, taking a business off the books that participate in criminal activities. Other incidents are far less obvious, for example, opting to exclude companies that deal in fossil fuels.

“It’s a difficult call to say you won’t support these companies because South Africa is in dire need of energy and by excluding fossil fuel producers, you’re potentially jeopardising the economy – and people’s lives and livelihoods. I think it’s important that insurers take a measured approach. Insurers, at the heart of it, are risk managers, so should guide their clients on the journey to improve their risk behaviour.”

Can ESG oversights cause losses to businesses?

Rulashe says definitely, “From reputational and talent risk to financial risk, ESG impacts can be extremely costly. A lack of governance in an organisation may be indicative it doesn’t take other

aspects seriously. In an age where employees want to work for businesses that take care of society and the environment, this could mean top talent chooses other opportunities.”

On the other side, Rulashe believes that ESG-led companies should benefit from better pricing, “They’re taking a holistic view in terms of how they can better manage their risk. This behaviour should be incentivised. We’re not there yet but, maybe one day, hybrid car manufacturers and eco-efficient building developers could receive cheaper premiums. During Covid-19, people who didn’t drive a lot could apply for reduced premiums. Their risk reduced and so did their carbon emissions. Their policies were changed accordingly. So, this kind of principle should apply.”

How insurers can integrate ESG-led practices

Rulashe outlines four steps for insurers to take:

1. Be ultra-transparent: Insurers need to report accurately to their stakeholders on the impact of ESG on their performance and other related aspects.
2. It must be led from the top: Leaders must take accountability for implementing and driving strong risk management strategies aligned to positive ESG outcomes.
3. It should be independent: Ideally, ESG management requires independent oversight from board members. With strict, sometimes quite cumbersome regulatory requirements, it makes sense to have a dedicated person and team driving the agenda. Going forward, ESG will likely be audited, receiving the same level of scrutiny as an organisation’s financial data. It must be taken seriously.
4. It should be part of the culture: Board and management teams need to show diversity, disclose remuneration, and how votes happen. Any unethical behaviour must be dealt with swiftly and decisively across the whole value chain, including suppliers.

In addition, insurers need to fully appreciate the evolving ESG risk landscape. “Insurers have a meaningful, influential role to play in championing ESG. Part of this means making some big decisions about whether to participate in certain key risks. For example, a business can make the call to exclude any organisation involved in human rights violations or environmental degradation. On a more positive note, maybe an insurer takes proactive steps to include organisations that are ESG-led, and accelerate renewable energy adoption, for example. It’s about operationalising ESG.

“Insurers need to be creative and innovative to come up with solutions that make policies more accessible and affordable. ESG, ultimately, should be a great thing for insurance, because it enhances the societal and risk management role moving forward.

“At Santam, we are proud to be driving ESG at every level of our business, from our Partnership for Risk and Resilience, which promotes disaster preparedness in vulnerable municipalities, to our internal employee value proposition and governance structures. For us, ESG is an integral part of doing insurance, good and proper.”