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In Depth: Making ESG meaningful

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Nadia Bagijn, of Travelers, explores how the insurance industry can help financial institutions lead the way

It’s a term that has become increasingly powerful in the past decade. ESG, shorthand for a company’s environmental, social and corporate governance standards, can impact an organisation’s ability to serve customers, attract investors and employees, and shape public opinion.

But what the term actually means is less clear. The absence of consistent global regulations for ESG practices has led to an increase in greenwashing, leaving the public with vague or sometimes false impressions of how environmentally sound a business is in reality. A company may claim, and perhaps also believe, that its ESG practices are stronger than they actually are – or promote environmentally friendly practices in one arm of their organisation as it condones diametrically opposed practices in another.

Businesses are under increased scrutiny as a result. In September, the U.S. Securities and Exchange Commission (SEC) and BaFin, Germany’s financial regulator, launched an investigation into allegations that Deutsche Bank AG’s DWS Group asset-management practice has been misstating environmental – and possibly social
– credentials of some of its ESG-labelled investment products, according to Bloomberg. In October, an activist investor in Royal Dutch Shell publicly pushed for the energy giant’s breakup, urging it to spin off its liquified natural gas, renewables and marketing businesses into a separate company.

Insurers will play an important role by partnering with financial institutions to evaluate their business risk and help them gain a clear-eyed understanding of any shortcomings

These are just a couple of examples of problems that regulators, including the UK’s Financial Conduct Authority (FCA), are facing with increased frequency. Often what starts in the US moves towards us in the UK, so this is something we are watching closely. The SEC is active on ESG disclosures to investors, and here in the UK, we have to prepare to see more activist shareholders reacting to potential concerns.

Guidance from the FCA is expected to provide greater clarity about how financial institutions assess ESG practices. But insurers will play an important role by partnering with financial institutions to evaluate their business risk and help them gain a clear-eyed understanding of any shortcomings. Here are a few ways I see insurers helping to support strong ESG practices:

Clarify the risk: Insurers can demonstrate risk by reviewing historical trends. We have access to an enormous amount of data – and that’s an important asset we can use to help clients understand and manage their risk exposure as it relates to ESG.

Ask difficult questions: Expect insurers to scrutinise the companies seeking cover and be strict about underwriting. While this may make it more difficult for mining companies or heavy polluters to find cover, it should also be instructive for those looking to improve their risk profile as ESG takes on increased importance for clients, investors and the public.

Build a bridge: In the coming years, companies that were once insurable may struggle to find cover due to the severity of risks they face. But before that happens, insurers can partner with businesses to help them gradually work toward more environmentally sound solutions. We can’t immediately pull the plug on insuring these companies, so we will have to sit down with them and our partners in risk management to help these businesses best manage the exposures they face.

Nadia Bagijn is head of financial institutions for Travelers Europe.

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