Spotlight: Why it’s time to recognise ESG as an SME resilience factor

Many SMEs want to become more sustainable, which should lead to improved risk control – but can the insurance industry encourage higher environmental, social and governance (ESG) compliance? New research shows the market is evolving. Rachel Gordon reports.

SMEs that take ESG seriously are likely to be more resilient – and so be a better insurance risk. It may appear common sense but, to date, a formal approach to sustainability has been the preserve of large organisations.

ESG reporting is mandatory for companies that are listed, have turnovers over £500 million and/or employ more than 500 people. But there are some 5.5 million SMEs in the UK forming over 99% of the business population. With interest in becoming more sustainable increasing among smaller firms, this creates significant opportunity for the insurance sector.

Business information provider Crif and Insurance Post sought to find out how insurers are working with SMEs on ESG and whether ESG is beginning to influence risk assessment and rating.

An Insurance Post survey in conjunction with Crif on business resilience was carried out among three core groupings: large (multi-line) insurers; smaller insurers; and MGAs and brokers.

While it may seem more challenging to implement these initiatives in an SME, even small changes can have a real impact

Dougie Barnett, director for commercial customer risk management and sustainability, Axa UK

Industry response

There is goodwill and engagement from some insurers and, as Dougie Barnett, Axa UK’s director for commercial customer risk management and sustainability comments: “ESG initiatives can significantly benefit small businesses by enhancing their reputation, reducing risks, attracting investment and promoting employee satisfaction. While it may seem more challenging to implement these initiatives in an SME, even small changes can have a real impact.”

Although some firms may argue that sustainability is cost-prohibitive, he says many initiatives can be implemented for little or no cost.

What is more, ESG can set firms apart from their rivals. Phil Barton, CEO of broker Partners&, says his firm is using ESG as a differentiator. The company uses its own sustainability work to educate clients, as part of a toolkit for SME clients. “We can put forward practical solutions that will have an immediate impact. My belief is that ESG will ultimately define the insurable assets in our market and the people who serve them.

“Partners& has a variety of work ongoing under the ESG umbrella, including protecting the environment and talent sustainability such as apprenticeship and returners programmes. It has also aligned with charities that support its ESG goals. The industry needs to move away from short-term transactional business models – even for SMEs – and ESG is a key driver of this shift.”

He adds that insurers are also part of the picture, pointing out that Aviva, AXA and Beazley are leading the field. “They cannot provide all the solutions, but if business does nothing we will end up with many uninsurable assets.”

However, ESG assessments within SMEs are largely at an early stage and larger brokers will have more sophisticated tools.

Big companies use a number of standardised metrics and methods to measure the impact of their ESG initiatives. For small businesses this can be more challenging, but there are simple ways to track progress

Dougie Barnett, director for commercial customer risk management and sustainability, Axa UK

Very few are currently rating SME resilience; however, industry players and service providers are now offering ESG assessments for SMEs.

For example, national broker, Marsh, has developed an ESG Risk Rating, a self-assessment for clients that enables them to measure ESG performance, improve risk and gain access to insurance benefits.

On completion, the company is scored and, subject to advice, may find cover is available from specialist insurer Beazley, which operates Syndicate 432. Launched in 2022, it provides exclusive capacity for Beazley clients with a strong ESG rating.

Crif, Europe’s leading provider of insurance and business credit information, has also launched ESG solutions in 2023, to assess the ESG profile of any UK SMEs, including micro-businesses, thanks to a pioneering new data repository and scoring service.

Meanwhile, as AXA’s Barnett says: “Big companies use a number of standardised metrics and methods to measure the impact of their ESG initiatives. For small businesses this can be more challenging, but there are simple ways to track progress.  

Setting clear KPIs at the outset and measuring them at regular intervals is an easy way for businesses to check they’re on track – for example, recording energy savings, waste reduction (percentage recycled), employee turnover rates, or community engagement hours. It’s important to review goals regularly too. Employee surveys can provide valuable insights into company culture and job satisfaction – these can be done with online tools at minimal cost.”

He adds: “Measuring customer satisfaction can be conducted through third-party tools such as Feefo and Trustpilot. These are valuable barometers that are used by customers when making choices and can help to identify problems early so action can be taken. 

Communication is also a useful tool. Asking employees and customers for their thoughts on the business’s ESG initiatives and inviting new ideas promotes inclusivity and collaboration. Businesses can also create reports on the ESG work they’re doing to post on their website and share them in communications with stakeholders.”

The business resilience survey – key points

SME resilience –  today’s top 5 biggest risk factors

 

The survey respondents were asked which risk factors were most important when rating SME resilience, with the top five as:

1. Financial stability
2. Claims history
3. Cyber
4. Location (geo-spatial)
5. Technology infrastructure

But there is divergence. For example, 42% of brokers rated health and safety risks as affecting resilience – which is far higher than insurers (smaller insurers/MGAs only put this at 17%). This may be because brokers are in close contact with clients and are aware of day-to-day incidents that raise risk.

Meanwhile, insurers were far more mindful of technology infrastructure as a risk (40%) – far higher than brokers at 24%. Insurers, which have long battled with legacy IT problems, may well have more insight here.

But, what of ESG? This makes it into the listings, but as shown, it is clearly seen as more important by large insurers.

ESG and future resilience – a changing future picture

 

Respondents were asked where they anticipated change over a five-year time frame. The top five is as follows:

1. Cyber risk    
2. Technology infrastructure
3. Financial security
4. Online presence
5. ESG compliance

Cyber risks jump to number one, but ESG compliance is now placed in the top five, which is a significant leap.

What are the most important aspects of ESG linked to business resilience?

 

The top five factors are:

1. Ethical supply chain
2. Risk management
3. Carbon emissions
4. Energy consumption
5. Health and safety 

The table shows a diversity of views, according to cohort, with insurers emphasising that an ethical supply chain has a crucial role, whereas brokers again, see health and safety as being a resilience priority.

Who is using ESG as a rating factor?

 

Understanding of ESG as a resilience rating factor is growing. And looking at large insurers, it is used ‘always’ or ‘in most cases’ by 58% of large insurers, and for smaller insurers, the figure is 48%. But most brokers do not see ESG on the rating radar, with 71% saying they never use it.

What methods are used to rate ESG?

 

Respondents use a range of methods, with large insurers and brokers using questionnaire/self-assessment, while smaller insurers preferred external audits – in-house risk management audits are also popular. Relatively few use publicly available data, suggesting there are limited sources of this.

 

In terms of what would encourage more ESG compliance rating, respondents called primarily for access to better publicly available data. Other requests were for more pressure from regulators and proven correlation between ESG compliance and insurance risk. Notably, brokers in particular also call for greater appetite from underwriters as a pull factor.
 

The industry needs to move away from short-term transactional business models – even for SMEs – and ESG is a key driver of this shift.

Phil Barton, CEO, Partners&

 

Embracing ESG for a sustainable SME future

ESG integration in the SME sector is still in its early stages – but momentum is building. It’s clear that SMEs and the brokers who serve them need clearer guidance and greater standardisation to embed ESG into their business strategies. While ESG is increasingly recognised as a key resilience factor, many SMEs still face uncertainty about how to demonstrate their compliance effectively.

The insurance sector’s gradual recognition of ESG’s role in driving SME resilience and shaping risk assessment and insurability is a promising sign that can only bode well for the future. Continued progress will depend on collaboration and innovation to provide SMEs with practical tools and clearer pathways to embed ESG principles into their operations – ultimately helping to secure their resilience and insurability in a rapidly changing market.

 

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