Brokers and insurance companies have long focused on helping companies mitigate climate risks, but managing a wide range of environmental, social and governance considerations is becoming a critical part of how the industry does business.
Employees, policyholders, investors and rating agencies, in addition to climate activists, are increasingly examining how companies, including brokers and insurance companies, address a range of ESG-related issues, including environmental protection, climate change, diversity and inclusion, racial justice and workplace behavior, experts say.
In June, an activist investor forced the board of Exxon Mobil Corp. to select "climate-conscious" directorial candidates, and in May a court in the Netherlands ordered the Royal Dutch Shell PLC to reduce CO2 emissions by 45% from 201
A A changing regulatory framework and legislative landscape also drives companies to be more transparent in their ESG practices. As a result, brokers and insurance companies, like other financial institutions, are under pressure to provide more detailed ESG disclosures, and as the US moves toward mandatory disclosure requirements, companies may be exposed to new risks (see related story).
Meanwhile, disputes over ESG and sustainability issues are increasing.
The ESG covers a wide range of topics and becomes a key driver of business strategy for insurance companies and brokers, said David Sherwood, a Stamford, Connecticut-based CEO. at Deloitte & Touche LLP.
Many companies' primary ESG focus has been on climate change, but there are other important components to consider, Sherwood said. These include "S" issues, such as human capital, data protection and cyber security, as well as "G" issues such as business ethics, corporate governance, board responsibilities and remuneration to management.
“When you look at the climate and some of the driving forces behind it and the impact it will have on companies and society globally, and you look at some of the other risks in the ESG categories, such as cyber, you can understand why it attracted the attention of insurers and brokers, Sherwood said.
Insurers face broad ESG risks because they affect both their assets and liabilities, says Isabelle Santenac, global insurance manager at Ernst & Young, in Paris.
As investors, insurers initially focused on the asset side, in terms of where they invested their money and how they could influence as investors, she said.
"Now we see that there is a clear change and they are focusing on the debt side, on what the risks are and what the ESG's impact is on the risks they are writing," Santenac said.
Many insurance companies have set emission targets for their organizations and a growing number limit the coverage for companies that, for example, build or operate coal mines.
Brokers have an important role to play in helping policyholders understand what their ESG risks are, what coverages they may need and risk management steps, experts say.
As climate change risks evolve, brokers can guide companies to design a sustainable insurance program, which embeds and raises awareness of ESG issues, and explains how they can adapt to environmental conditions to be better prepared, Santenac said. Many insurers and several brokers have signed up to the UN Principles for Sustainable Insurance, a global sustainability framework that aims to encourage greater integration of ESG issues into insurance.
It is in the interest of insurers to encourage their customers to participate in the race against net emissions, says Nigel Brook, London-based partner at Clyde & Co LLP.
“Ultimately, companies that do not care about human rights, environmental degradation and do not care about governance are not sustainable and will not work as well. It makes sense that the companies that get the right things will work better, says Brook.
Corporate governance, ESG integration, working conditions and human capital management are key issues for insurance companies and brokers, says Sercan Soylu, Toronto-based. Deputy Director, Insurance, Real Estate and Asset Management, at Sustainalytics, a unit of Morningstar Inc. (see related story)
Recent mergers and acquisitions are moving, especially in the brokerage sector, the importance of addressing these issues, Mr Soylu said .
As intermediaries, brokers have a strong control responsibility over the products they market and sell to policyholders, he said.
J. Powell Brown, President and CEO of Brown & Brown Inc., said that ESG strategies are part of good business practice. "It will make us and all the other companies better," he said.
For a broker, the social and governing aspects of the ESG are more important, while the "E" in the ESG is less, because while brokers have an environmental responsibility, they are not like an oil company that has extensive environmental exposure, Brown said.
In March, Brown & Brown published their first ESG report, a 28-page document that was said to hold the company accountable. The report, which includes information on a range of topics, including ESG governance, diversity and inclusion, and climate change mitigation, will enable Brown & Brown's teammates, investors, business partners and customers to gain a better understanding of how we do business. , Sade Mr. Brown.
Katherine J. Brennan, Attorney General of Marsh LLC in New York, said that ESG issues play an increasingly important role in attracting and retaining staff because employees and job candidates do not want to work for an employer that does not address these issues.
From a business perspective, Marsh sees an increased demand for proposal plans from clients to work with companies engaged in ESG, while shareholders also look at companies' ESG practices when deciding where to invest, she said.
"As a company and together as an industry, we have a platform to implement change in many of these areas, and because we have that platform, we have a responsibility to drive change in many of these areas," said Ms. Brennan
Parent company Marsh & McLennan Cos Inc. released its first ESG report at the end of the first quarter with more information on a number of ESG-related areas, from how it measures its carbon footprint to how it uses data to manage its workforce.
Several of the major brokerage firms have publicly described climate commitments and commitments in their ESG reports.
In its impact report for 2020, for example, Aon PLC outlined its commitment to achieve net zero greenhouse gas emissions by 2030. “The transition to net zero is a complex, global challenge. There are enormous opportunities for Aon and our industry in general to create innovative new solutions and services that support our customers' efforts to achieve their sustainability goals, the report says.
Eric Andersen, president of Aon, said the broker wants to be "part of the solution."
"We want to help use the risk reduction skills we have, the risk transfer functions, the availability of alternative capital, modeling to be able to help these customers when they transition," Andersen said.
Management of ESG risks for the brokerage industry extends from the boardroom to the projects they choose to undertake and the supply chains they engage with.
Last year, Marsh McLennan developed a set of customer engagements. principles adapted, for example, to the UN's goals for sustainable development. The principles are designed to strengthen their commitment to sustainable goals regarding health care, human dignity, gender equality, energy security, access to reliable and sustainable energy supplies and job creation.
The principles have been rolled out to MMC's business leaders, and protocols and operational lines within companies have been established so that if things come up that could potentially conflict with these goals, they can be escalated, Brennan said.
"That way we take different voices to the table. To review proposed projects and evaluate whether a work can continue, she says.