An introduction to ESG
As the UK hosted UN Climate Summit (COP26) begins, Isaac Sahhar Business Development Officer – Energy & Construction Division, gives us an introduction to ESG, providing background as to what it is, why it’s important, and how it will impact insurers and reinsurers.
Isaac, please can you explain to our readers, what is ESG?
ESG is an integral part of our work and remains on the agenda of most board meetings. It is the measures of
environmental, social and governmental factors within companies and countries for the evaluations of sustainability development and ethical impact. Overall the three categories summarise quantitative and qualitative statements, identifying companies that have a preponderant financial risk caused by their environmental conduct as well as social and governmental practices. The E captures energy and management regarding environmental impact. S covers the labour criterion, focusing on how a company fosters its people and culture. G considers the governance of E and S and how organisations stay ahead of violations.
So, is it a new concept?
ESG was incorporated in the financial evaluation of companies in 2006 when the United Nations Principles for Responsible Investment(1) advocated the issues. It has improved risk potential by reducing investment risk and creating investment value.
But, what does that mean for companies that are unavoidably environmentally unfriendly, such as oil and gas companies?
For oil and gas companies, investors are studying their ESG factors as the effort of promoting clean energy, sustainability and energy transition is enhanced. Oil plays avital role in our society, as it is not only the main source of energy but it also allows for the production of several consumer goods. Nonetheless it holds potential hazards for the environment. Pressure has increased within the past few years for oil and gas companies to invest in renewable energy and to decrease their negative environmental effect.
It sounds like something that we should all be aware of then!
Exactly, with global institutions such as the UN uplifting sustainability, insurers and reinsurers are beginning to focus on the ESG principles adopted in the industry. ESG allows reinsurers to determine whether a risk has more probability of harmful events, measuring the financial risk exposure. The better the ESG performance, the less risk of experiencing incidents. The Principle for Sustainable Insurance(2) was launched in 2012 by the UN, coming under the umbrella of UN Environment Programme Financial initiative.
Where does Lloyd’s of London stand on this?
Lloyd’s of London has also joined the ESG measures, having had their first report published in December 2020(3).
Commitments for the marketplace included asking managing agents not to provide insurance cover for oil or coal from 1 January 2022 and not to renew such risks after1 January 2030. Companies that consider ESG aspects will have a higher valuation than those who don’t. Companies are already experiencing the financial consequences of failing to act on sustainability as many countries have implemented regulations such as carbon taxes. The financial and banking sector are also integrating ESG rules into their funding criteria. Recently, it has been announced that buyers of insurance who enjoy a favourable ESG position, will have a direct impact on the cost of buying certain covers.
On the international scene, several of the world’s largest reinsurers such as Munich Re, Scor, and Swiss Re, who are also the founding members of the UN-convened Net-Zero Insurance Alliance, have made pledges to move towards “net-zero emissions”(4). They will engage with clients to develop products with low or no emission technologies as well as improving claims handling and even going beyond this to include underwriting and risk management.
It is very much worth noting that here at home, the Regulator Task Force on Climate has announced its intention to make Financial Disclosure mandatory by 2025.
So what can leaders from oil and gas companies do?
Leaders should consider including ESG initiatives to avoid losing market power which would impact market price. For environmental management carbon emission should be reduced, as well as waste disposal and resource conservation. Emission caused by production and refining plants could be controlled.
Social accountability for the companies could include workers safety and health, supply chain relationship and community involvement. Corporate governance will have to include transparency in their reports, and leadership diversification. Implementing the aforementioned will allow the oil industry to innovate and cover the principles of sustainability in insurance.
On the whole ESG is here to stay and will impact all walks of business life and those who have delayed adding it to the agenda, must do so now before it is too late.
Thank you Isaac. If any of our readers have any questions about ESG, please contact Isaac Sahhar isaac.sahhar@uib.co.uk
(1) Principles for responsible investment
(2) PSI Principles for Sustainable Insurance
(3) Environmental, Social and Governance Report 2020
(4) The Net-Zero Insurance Alliance
