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Spotlight on ESG: Validating the ESG credentials of the insurance supply chain

Sara Costantini 2022
Sara Costantini, managing director, CRIF Decision Solutions

In April 2022 new legislation came into force requiring UK registered companies and Limited Liability Partnerships – with over 500 employees and an annual revenue of more than £500 million – to produce a sustainability statement on climate-related disclosures in their annual strategic or energy and carbon reports.

Looking specifically at the financial sector, the FCA states in its ‘Strategy for Positive Change’: “If the financial sector is going to help support the transition to a more sustainable future, market participants and financial services firms need high quality information, a well-functioning ecosystem, and clear standards. And consumers need to be able to rely on firms to take ESG seriously, avoid ‘greenwashing’ and deliver on their ESG promises.”

In a recent survey conducted by CRIF Decision Solutions in conjunction with Post, just over 70% of insurer respondents ranked ESG as a top five priority for their organisation and a further 23.5% as a top ten priority (see chart one).


The results indicate that insurers are focussed on getting their internal ‘ESG house’ in order. However, things become a little more disparate in relation to management of their supply chain. Only 8.8% of respondents currently validated all the ESG credentials of their supply chain, with 41.2% saying they validated some. 16.2% said they were planning to do so in the next 12 months, with 23.5% having no immediate plans to do so, but admitting it was on the ‘to do’ list (see chart two).


Strategic necessity

With the supply chain operating as an extension of the insurer’s brand, focusing on the ESG factors of supply chain management is not simply a communications strategy but a strategic necessity in a rapidly changing and increasingly transparent global economy. ESG is not only important for reputation and brand values but is also a driver for increased profitability and reduced business risk and an insurer’s ESG credentials are highly inter-connected with those of its supply chain.

With ESG likely to only gain greater importance in the coming years, why are so few insurers fully scrutinising the ESG credentials of their supply chain?

The insurance market is possibly two years behind institutional investors in its ESG maturity. Some insurers – especially those smaller organisations without investment arms – are playing catch up when it comes to ESG, with available resource necessarily focused on internal requirements. To validate the credentials of its supply chain, an insurer must first have a ratified ESG strategy and policies successfully embedded across its in-house operations. Only then can clear supply chain expectations and the associated metrics against which suppliers will be measured be designed.

Delegating responsibility

Some insurers may mistakenly feel that by not scrutinising the ESG credentials of their supply chain they are safely delegating the responsibility to the suppliers. This approach represents significant business risk as ignorance will not afford a defence in the event of an ESG related supply chain issue.

Insurers will also be aware of the possibility that in validating their supply chain businesses they will uncover activities or gaps in suppliers’ ESG credentials that represent red flags. This scenario creates a requirement to act on those findings, either by agreeing and monitoring an improvement plan, or by determining to replace the supplier. Each alternative resolution requires additional resource to manage, and supplier replacement is not straight forward, with insurers sometimes struggling to find the outsourced skill sets they need in the post pandemic environment.

Unquestionably, ESG issues in the supply chain carry significant operational and reputational risk. Insurers must ensure that their ESG principles are consistent throughout their supply chain and wider ecosystem to have credibility. Supply chain vulnerability can expose insurers to hidden and uncontrollable risks that negatively impact ESG, these could include environmental pollution; workforce health and safety incidents; labour disputes; human rights abuses, corruption and bribery, geopolitical considerations and more. For most global brands, their greatest exposure to undermining their ESG efforts and falling out of ESG compliance can occur in their supply chain.

Conversely, by improving ESG performance throughout their supply chain, insurers can enhance processes, reduce costs, increase productivity, innovate, differentiate their brand, and improve outcomes for the communities within which they operate.

External experts

The requirement and benefits of ESG-related supply chain scrutiny are clear. Why, then, are so few insurers using external experts to validate their suppliers when almost two thirds, 61.1% of respondents said they would find it useful to use a service to validate their supply chain’s ESG credentials on a regular basis (see chart three). And nearly half, 48.5% (see chart four) felt annually would be the appropriate frequency for an external validation exercise. Despite these findings, when asked if they used external validation, the majority, 57.4% said they never did. Just over a quarter, 25.9% did so occasionally and 16.7% said they mostly used external validators (See chart five).


There is a real danger that some insurers run the risk of falling behind. The good news is that it is not too late to address the issue. And external validation of supply chain ESG credentials represents an opportunity to reinforce credibility and create a USP.

Lack of regulation and standards in the ESG arena make it fundamental to be supported by accredited external partners, ideally with credit rating agency expertise and a proven methodology. ESG index score-based solutions are available which benefit insurers and their suppliers, and which offer the credibility of annual certification, together with country specific procedures to service a global supply chain.

Insurers can validate and ESG index score their suppliers against five key areas: business, environmental, social, governance and industry, providing them with an accurate overview of the supplier’s ESG activity and credibility in their ESG related supply chain management. Meanwhile, supplier appetite for a validation service that will provide them with an ESG score and a certificate, valid for 12 months, is high. The credibility afforded by a certificate, which can be used with multiple customers, means that suppliers are willing to cover the associated cost, which is typically pay-as-you-go.

ESG index score-based solutions require suppliers to complete an online questionnaire and self-declare the actions taken by the company to meet required ESG principles. Multiple data sources can then be used to cross reference, analyse, and validate the information provided, requesting further information as necessary. The solution can calculate the overall ESG Index score accordingly, divided into five classes descending from A to E. Suppliers benefit from the ability to download their ESG index certification and promote it on their website and insurers benefit from the credibility of an external expert validating the suppliers that make up their supply chain.

With such time and cost-effective external validation solutions available, supporting collaboration between insurer and supplier and providing business benefit to both parties; external ESG validation services are surely the way forward for an informed and proactive insurance market? 


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