Some risk managers ‘tied in knots’ over ESG

Risk managers are clearly getting more involved with ESG risks but some are struggling to properly identify all their exposures in what is a huge area, said an Airmic board member taking part in our Risk Frontiers Europe research. Some of his peers from the UK said that ESG issues are beginning to have an impact on their insurance programme while at the same time influencing their choice of carrier, with both of these trends only set to accelerate.

“I’ve seen intelligent and well-meaning risk management professionals ‘tied in knots’ over ESG, simply because they haven’t taken the time to identify and assess the ESG exposures in a structured format,” said Glenn Ellis, Airmic board director and former risk and insurance manager at BT.

“There are some particularly good ESG models and templates available that can provide the starting blocks,” he advised.

Ellis thinks companies should put more focus on social and governance risks when carrying out this assessment.

“Often, companies put more emphasis on the environmental and climate risks within ESG, which I understand given the high profile of net zero and sustainability. However, within  governance there is potentially even greater exposures, and I am aware of an increase in  D&O liability event-driven claims due to poor governance. Similarly, we are seeing more scrutiny on company’s working practices and corporate culture, with a few well-publicised cases in the media in recent months, which clearly impact the social part of ESG,” said Ellis.

Jordane Terrasse, head of group corporate sustainability risk management and risk transfer at London Stock Exchange Group, said sustainability is increasingly at the forefront of insurance and she believes that sustainability strategies will impact insurance arrangements over time.

“We see more and more insurers asking pertinent questions around the firm’s sustainability strategy at renewal. This is important, as some of those strategic decisions could impact an array of insurance covers in the future – from D&O insurance, to PI or EPL, and even property from a climate risk and location strategy standpoint,” said Terrasse.

James Straker-Nesbit, senior insurance manager at Virgin Atlantic, said some insurers are already using ESG credentials as a gateway and won’t even talk unless buyers meet certain criteria.

Kate Loades, insurance director at Liberty Global, expects question about ESG strategies to ramp up. “I feel with rising scrutiny this will only increase in the future,” she said.

And the insurance buyers are beginning to ask questions about insurers’ ESG credentials before deciding where to place cover. There is an expectation that this will increase when the market softens and risk managers begin to enjoy more choice about which capacity they use. This is all part of companies wanting to ensure their business partners are also focusing on ESG issues.

“While insurers need to understand their clients credentials, in turn, clients are starting to demand more of their suppliers, including insurers. This means that one of the selection criteria of insurance partners in the future will include a review of insurers’ own sustainability strategy as any other suppliers, and it will have weight in the overall decision and selection process,” said Terrasse.

“We also ask insurers to provide their ESG info to us,” said Straker-Nesbit. “Pushing for greater ESG alignment with our insurers is fine to do when there is surplus capacity, but when there isn’t enough capacity in a hard market, as buyers we are likely to be more flexible because we can’t afford not to have the cover. Whereas insurers can cherry pick who they want to insure, particularly when the market is harder,” he continued.

“However, as the market softens, which it may well do over the next couple years, one might expect buyers to be able to make more choice about who they insure their risks with based on many factors, including ESG credentials. So that is something insurers might want to keep in mind,” he added.

Richard Hoult, head of risk and internal audit at Portakabin Ltd, said he is involved in contributing to parts of his firm’s TCFD submission. His team have also helped executives work on their sustainability risk appetite and challenged them about how serious they are on the issue. In addition, internal audit is also part of his wider remit and he is currently auditing the company’s net-zero strategy and plan.

“So we are challenging the assumptions in the net-zero strategy, what is happening to hit the goals and what is the risk of not getting there. So part of my job is about prodding and challenging, asking are we serious on ESG, have we got the money to be serious, and is the strategy and plan sensible or just a tick box exercise? Crucially, risk management needs to help ensure that if a company has promised something on ESG, they are doing something to achieve that, otherwise you could run into all sorts of problems on the legal and reputational damage side of things,” said Hoult.

George Ong, head of corporate governance and chief risk officer at Northern Ireland (NI) Water, said a successful ESG strategy should be clear about objectives and deliverables, with measurable outcomes and timelines. It should also incorporate the importance of working with key stakeholders, business partners and community to deliver the best possible outcomes to try and save the planet, he said.

Ong thinks insurers and their clients should collaborate to help facilitate better solutions for ESG risks.

“Most companies have their own initiatives and targets to comply with ESG, and insurance companies are no different. What will benefit both is when risk managers and insurers identify common ESG objectives and develop solutions jointly to contribute – financial and non-financial resources – to our ESG targets. For example, NI Water has already started planting one million trees to improve the raw water quality into our water treatment works and to reduce the impact and frequency of flood risks on our sites and the local community due to climate change. Insurers may wish to support such an initiative and at the same time help meet their own objectives in carbon offset. There is so much we could do and learn together when we collaborate to meet ESG challenges,” he said.