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.
Insurance firms collect a multitude of data over the years to inform decision-making and guide underwriting, pricing, and policy development. Many insurers also buy third-party data to enhance their data sets. However, because of the need for well-defined criteria and well-established data collection processes, insurance firms have little uniformity in how they collect data. In some instances, this may also happen across business units within the organization, generating unstructured data. As a result, these legacy systems of capturing data are counterproductive, as it creates a barrier to effectively aggregating data and analyzing trends to help provide the best solutions for clients. Working with unstructured data sets also makes it challenging to make decisions promptly, which can cause frustration for clients who need solutions quickly. Furthermore, another challenge that stems from this is the quality and certainty of the data. Some data can be outdated or inaccurate due to improper management over time. Capturing and managing data in this archaic way has resulted in an enormous amount of fractured data making it more difficult for insurance firms to build cohesiveness and seamless data integration to extract value. However, as pressure from stakeholders increases with ESG, some innovative insurers are beginning to manage their data such as claims, third-party liability databases, and climate and weather information more efficiently to enable them to develop a proactive approach to help clients strategically manage their ESG initiatives.
Some innovators among insurance firms have recognized the competitive advantage that lies in actively managing their data but also in adopting newer technologies to better derive insights from large data sets, including unstructured data. Innovators in ESG have moved beyond simply addressing ESG as a compliance issue to one that requires a strategic approach that helps mitigate risks and aligns with the company’s vision, values, and growth plans. Some insurers have developed policies and improved their underwriting process using data and analytics. For example, some insurers have integrated a centralized data platform where they can use AI software to help consolidate and manage data, from internal data sets and third-party data sets, to identify trends and measure risks. This enables them to improve their policy offerings as well as provide clients with better costs, given the accuracy of the data.
A few insurance innovators have expanded their services and taken a proactive approach by including risk consulting as part of their ESG framework. Risk consultants help clients develop and implement a process to identify, assess, and respond to risks that may impact a client’s strategic and operational plans. Furthermore, risk consultants can use claims data to educate their clients on best practices and support them in taking preventive measures to decrease risks. In other words, developing a proactive approach to identifying and managing risks can help prevent an adverse event from occurring or minimize its impact, build resiliency, and reduce costs for the client and insurer. For example, organizations that take an ESG risk management approach advise clients on best practices for doing business with entities that cause irreversible damage to the environment and in particular ecologically sensitive areas (e.g. protected areas). As a result, organizations avoid potential fines and stakeholder mistrust while improving their brand, reputation, and market performance. When insurers work on streamlining information, they are in a better position to help their clients strategically develop an ESG approach that will help mitigate risks, manage societal expectations, improve stakeholder relationships, and fundamentally help clients capitalize on having a strategic ESG framework.
The insurance industry plays a valuable role in ESG regulation and policy development, given that they have been monitoring and tracking many ESG-related factors for years. For example, in the US, insurance companies work with local, state, and at times the Federal government to improve government regulations related to the environment like climate change and its impact on forest fires and coastal floodings. Using data and analytics, they can take active roles to broaden the governance framework to include meaningful controls and processes that align their underwriting and investment strategies with ESG principles. As some insurers take a proactive approach to managing their data and leveraging technology and analytics to improve their service offerings, they have the ability to form a cohesive approach to ESG data management and reporting making them leading ambassadors for the insurance industry and its clients.
