Insurance industry willing and able to support risk managers on ESG

Faced with a rising tide of environmental, social and governance (ESG) reporting, risk managers are turning to insurers and brokers for help with data and risk assessment tools.

Large companies are increasingly required to disclose information on a range of ESG-related risks, including climate change, diversity, inclusion and, most recently, supply chains. Stakeholders such as banks, insurers, investors and supply chain partners are requesting more ESG information, while governments and regulators are busy drafting and implementing new mandatory disclosure requirements.

In Europe, the proposed EU Corporate Sustainability Reporting Directive (CSRD) will require large companies to report their sustainability risks and opportunities, as well as their impact on the environment. From April, UK companies will be required to report climate data in line with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). Meanwhile in the US, the Securities and Exchange Commission has been reviewing its ESG disclosure requirements with the intention of updating its climate and ESG reporting guidance.

According to Eugenie Molyneux, chief risk officer of commercial insurance at Zurich Insurance, requests from customers for help with ESG risks are growing. “We do see customers approaching us with respect to assessing risks. That includes supply chain, but climate change is a key topic at the moment. In particular an assessment of the physical risks,” she says.

RISK MANAGER ROLE

Risk managers can play an important role in ESG reporting, particularly on climate change assessments and risk related disclosure.

The involvement of risk managers in sustainability matters, and their requests for support from their brokers and risk advisers, varies depending on the specific reporting and disclosure requirements of their organisations, says Bruno Dotti, continental Europe practice leader, enterprise risk services and ESG at Marsh.

Sustainability managers typically lead the overall sustainability reporting effort, with risk managers providing information about the risks associated with the most important material topics of the organisation, explains Dotti. “This information comes primarily from the annual ERM risk assessment cycle and/or from other forward-looking strategic risk assessment exercises,” he says.

For more specific reporting elements, such as carbon emissions disclosure, risk managers may have a more active role, especially if their organisation seeks to comply with the TCFD requirements, Dotti says. “Climate is an area with increasing disclosure requirements, and risk managers have a key role in understanding the risks,” he adds.

In addition to providing risk information, risk managers can coordinate the overall disclosure effort, explains Dotti. “We can expect, especially in Europe, risk managers to be increasingly involved in sustainability-related matters, due to obligations arising from requirements associated with the EU taxonomy and the CSRD. This may lead to an increase in the number of organisations with risk and sustainability responsibilities consolidated into the same function,” he says.

Once a risk is identified, the most challenging step can be to form a granular view, says Molyneux. “Data availability is a key input, so if there are data challenges then one’s risk assessment may also be less robust than is desirable for decision-making purposes. This is particularly true where a risk is still emerging or evolving,” she says.

Take climate change as an example. Scientific estimates of future warming already contain a high degree of uncertainty, points out Molyneux. “When you layer on to that the uncertainty and effect of mitigating activities that a third party might take, and finally add data availability challenges, then the assessment may be valuable from a directional perspective in the early stages. As time goes on and estimates firm up, evidence or data is gathered and mitigating actions are known, then the assessment itself also becomes more robust,” she says.

ESG CHALLENGES

According to Dotti, risk managers face several ESG challenges. These include understanding ‘transmission’ channels and how to balance risk quantification with more qualitative data.

“A better understanding on the first point will properly complement the information coming from ESG ratings,” says Dotti.

“The second point is especially true for climate change. Aside from the physical risks, especially the acute ones that are already here, most exposures are medium and long term in nature. It is never easy to balance the need of quantitative information, which is frequently requested by international best practices for stress-testing purposes, with the significance of this information that will inevitably deteriorate over time,” he adds.

INSURERS’ ROLE

Insurers are uniquely placed to assist customers with their ESG assessments, given the nature of the industry and its access to data, according to Simon Tighe, group head of investments, treasury and credit risk at specialty insurer Chaucer. His company recently teamed up with Moody’s to deliver a new scorecard to evaluate a business’s ESG credentials.

“One of the big issues with ESG is the availability of data in a consolidated location. You can access data but normally it is through multiple channels. What we are doing is bringing that together in one place and consolidating it, removing the pain point for customers of having to answer questionnaires and then overlaying that with the risk assessment skills of the group,” says Tighe.

“If we can provide a Chaucer view of the counterparty’s ESG profile, then that counterparty can use that to create their transition plan. Key to remember is that Chaucer is committed to supporting the transition to sustainability and this scorecard is a tool that will help with that,” Tighe says.

Molyneux also believes that insurers are in a good position to help risk managers with their ESG requirements. “Through years of underwriting risks, insurers have extensive experience at assessing risks. Therefore, at Zurich we are very well versed in assessing a wide range of risks, including ESG related risks,” she says.

While each company should report what is relevant to them, there is value to be gained by looking at ESG-reporting leaders across a wide variety of industries, explained Molyneux. It also helps to understand the journey that companies have been on, reporting-wise. In most cases, there is natural improvement and progression, she says.

“With ever-increasing requirements, whether from investors, regulators or others, in the area of ESG reporting, this is an essential topic for companies to focus on. A lack of plans for, or clarity surrounding, ESG can be an existential threat to a company,” Molyneux warns.

KEY TOPIC

With sustainability now a key strategic and risk management topic, Marsh is also developing its climate and sustainability risk value proposition, according to Dotti.

“We support clients in embedding ESG risks into their ERM/risk management frameworks, with the goal of prioritising and improving ESG risks. We have developed an ESG rating that is both risk- and performance-centric, and enables clients to steer their improvements towards the factors that will generate more stakeholder value,” he says.

“On climate, and especially on physical risks, we use both our scenario modelling capabilities and risk engineering expertise to support clients in assessing the magnitude of these risks through a technical lens, which is very much required to direct long-term investments, especially in capital intensive sectors. However, our capabilities expand into helping clients understand, manage and report on the breadth of climate risk across transition, physical and liability,” he adds.