May 12, 2023

What is ESG Score and Why Your Insurance Company Should Care?

What is the ESG score?

According to PwC research, 76% of consumers say they will stop buying from companies that treat the environment in which they operate in poorly and according to Cone Communications research, 88% of consumers will be more loyal to a company that supports social or environmental issues. This means that companies should care about their environmental impact in order to preserve and grow their customer base. But caring about the impact alone doesn’t do much. Companies need to measure their environmental impact in order to improve it. But how?

This is where the ESG score comes in. ESG stands for environmental, social and governance. An ESG score is like a grade given to a company based on how well they take care of the environment, treat people fairly, and run their business responsibly. It helps to measure and compare how different companies are doing in these areas. 

Insurance companies like many others are under increasing pressure to assess their ESG scores. Also many new regulations are being introduced requiring companies to disclose their ESG performance. For example, The new EU Corporate Sustainability Reporting Directive (CSRD). Insurance companies need to comply with these regulations and ensure that their investments and underwriting decisions align with their ESG policies. But how?

How can your insurance company assess their ESG score?

Well, first of all there is a framework of 4 principles, that insurance companies should follow.

  1. We will embed in our decision-making environmental, social and governance issues relevant to our insurance business. 
  2. We will work together with our clients and business partners to raise awareness of environmental, social and governance issues, manage risk and develop solutions. 
  3. We will work together with governments, regulators and other key stakeholders to promote widespread action across society on environmental, social and governance issues. 
  4. We will demonstrate accountability and transparency in regularly disclosing publicly our progress in implementing the Principles.

Based on these principles, there are several designated organizations who assess insurance companies’ ESG scores. Or insurance companies can do it themselves. However, self-assessment should be supplemented with third-party validation to ensure accuracy, transparency, and credibility of the assessment.

For example, in 2022 highest ESG scores (indicating low risk) were awarded to Allianz, AXA, Zurich, and Swiss Re. All of them got 92.9 out of 100. These ESG scores were provided by MSCI and then nominalized to a score out of 100 (with higher being better). Lowest scores were rewarded to Berkshire Hathaway, China Life Insurance and Aon with the score of 35.7 out of 100.

Different organizations use different methodologies for assessing ESG. Although, in the end of the day all ESG assessments should be comparable to each other.

What are the exact steps to take for complying with the regulations?

1. Define ESG factors and set goals

Your insurance company should identify and define the ESG factors that are most relevant your company’s business and stakeholders. Based on the defined ESG factors, the insurance company should set specific and measurable ESG goals.

2. Collect data

Collect data on your company’s activities, policies, and practices related to the defined ESG factors. This may involve internal audits, stakeholder engagement, and benchmarking against industry peers.

3. Analyse ESG performance

Analysing ESG performance involves looking at the data that has been collected about the your company’s activities, policies, and practices related to the defined ESG factors. It helps your company understand where they could improve.

4. Develop ESG reporting framework

Your insurance company should develop a reporting framework for their ESG performance, which includes the defined ESG factors, ESG goals, and data analysis. The reporting framework should align with relevant reporting standards and guidelines, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB).

5. Measure and report ESG performance

Your insurance company should report their ESG performance to stakeholders, including customers, investors, and regulators. This can include publishing ESG reports, disclosing ESG metrics in financial reports, and engaging with stakeholders on ESG issues.

The pressure to assess ESG scores is increasing, and complying with new regulations is critical. By following these 5 steps, your insurance company can improve their environmental, social, and governance practices, align their investments and underwriting decisions with ESG policies, and build trust with their stakeholders. Ultimately, a strong ESG score can help your company preserve and grow their customer base, attract investors, and create long-term value for all stakeholders.

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