Turning the fine words of carefully crafted corporate environmental, social and governance strategies into a meaningful reality is one of the top priorities for general insurers. However, as David Worsfold discovers, it remains a complex challenge
Insurers do not sit in splendid isolation, with neat boundaries, tight control over their products -– and thus over their reputations. They have extended supply chains, from the brokers who bring them business to the vast array of specialist firms that ensure the insurance promise is delivered when claims are made. Many of those firms are not even direct suppliers, but sub-contractors of other firms.
“Supply chains are vital because you have to look up and down to see what they are doing. Firms must start by aligning values with clients and suppliers,” says Professor Paul Watchman, special legal adviser to the United Nations Environmental Programme Principles of Sustainable Development and the Net Zero Insurance Underwriters Alliance.
“We also need an understanding of its limitations. It is a risk management tool, and a new way of looking at business – but it can be misused, and we need to be on guard against that,” adds Watchman.
Those cautionary words may go some way to explain why the general insurance market is adopting a gradualist approach to delivering its ESG promises. This is not through any lack of priority placed on ESG. Insurers and their major suppliers know that the world, its customers, and a growing army of campaign groups are watching their every move. Reputations are at stake. Over-promising and under-delivering will be judged as harshly as failure to act.
Learning from asset management
The asset managers that support the vast institutional investment operations of the major insurers have been talking about ESG for longer and already offer clarity and accountability on their investment strategies.
“The investment side has definitely been ahead. We calibrate across the board, especially bringing in the asset management side as they have been focussing on this for longer”, says Allianz’s Melnyk.
“We’ve been investing in offshore wind farms and social enterprises in Africa and elsewhere for decades. The institutional knowledge is there and we need to find ways of sharing that knowledge and break through the Chinese walls that sometimes exist in large insurers.”
The general insurance market can learn from how their investment colleagues have tackled some of the trickier issues when it comes to scrutinising supplier business operations, such as the scope 3 indirect greenhouse gas emissions, which cover a wide range of issues from business travel to the use of paper in an organisation.
“Tackling Scope 3 emissions can sometimes prove tricky, with data challenges across the supply chain, from how procurement is recorded through to product in use data. Getting access to this data and being able to understand it gives us greater control over our environmental impact,” says Waddelove from LV.
“As such there is a huge amount to learn from other sectors in managing our Scope 3 emissions, and product in use emissions, and how to work across the supply chain to reduce emissions.”
Supply chains are an extension of an insurer’s brand and thus a guarantor – or threat – to its brand, says Zelda Bentham, group head of sustainability at Aviva: “It has become increasingly important for insurance companies to partner with suppliers which align to their ESG strategy and vision. ESG is getting an increasing level of attention from government, boards, investors and the general public leading to a greater influence over an organisation’s reputation. This shift provides new challenges for reputational management as supplier issues can reflect directly on an insurer, effectively making the supplier an extension of an organisation’s brand and reputation.”
If supplier alignment is so crucial to insurer reputations why is there apparently so much caution in driving harder on tougher commitments to delivering on the alignment of values Professor Watchman says is so important?
A recent survey conducted by CRIF Decision Solutions in conjunction with Post of insurers’ attitudes to ESG and their supply chains exposed this caution. It found that 60.3% of respondents only expected their suppliers to be aligned to ‘most’ of their ESG strategy (see chart one), with only 7.4% saying they had to be ‘wholly aligned’.
There are good reasons for this, says Andrew Waddelove, head of sustainability at LV: “We recognise we are on a journey to reducing our impact on the environment, supporting the communities in which we work, and offering support to our people. We recognise that not all our supply chain partners can implement a raft of such policies overnight, and that this is a journey that will evolve and change. As such we need to take a collaborative approach.
Regulation has a part to play
ESG is far from a fixed concept. It is constantly evolving, as it responds to external challenges such as the war in Ukraine. This has shifted the dial on energy policy, pushing the quest for sustainable renewable energy sources higher up the policy agenda of European governments and introduced a fresh raft of challenges to governance as businesses interpret the impact on the sanctions imposed on Russia.
It also has a social dimension as people want to know what help firms have offered the millions of refugees who had fled their country. It illustrates the connection between the E, the S and the G.
Many countries already have tough regimes on gender equality, provision for people with disabilities, rules on modern slavery and, at least in the UK, a new focus on vulnerable customers. For insurers there is an extensive set of complex international regulations on solvency and conduct.
In the environmental arena, things have moved more slowly with the promised green taxonomy to help define green investments still struggling through the European Union.
This is disappointing says Professor Watchman: “If we don’t have government, business and civil society all rowing in the same direction, we are not going to be able to achieve anything. This is something on which we must have global co-operation.
“Regulators move very slowly because the whole process of developing policy. Consulting on it and refining it takes time. Once they have been agreed, the people enforcing the rules are then engaged in a learning process”.
Insurers are looking for more guidance in this crucial area, says Waddelove, who says this would be welcomed by customers too:
“There could be a role to play for regulators to ensure there is consistency for consumers in ESG reporting. This means ensuring that any products labelled as ‘green’ have credentials that means they are contributing to reduced environmental impacts.
“The benefits would be consistency in reporting, notably around areas such as scope 3 emissions, and a common language that consumers could identify with to assess the credentials of the companies they choose to buy insurance from.”
“While we have a clear end goal in our 2030 and 2050 targets, we will need to work with our suppliers to educate them on what we require and share knowledge and best practice. We understand this needs to be iterative to ensure we can work with our suppliers.”
The complexity and fragmentation of the insurance supply chain also has a key part to play. Many of its suppliers sit a long way down the supply chain and are often small, very specialised businesses that need help in joining the journey, especially when potentially asked to meet a wide range of objectives across the whole ESG spectrum.
Complex and demanding
“It’s an increasingly complex and demanding business ecosystem – and ESG is broad,” says Michelle Tucker, sustainability manager, UK & Ireland for Crawford & Company.
“There must be a great deal of caution over the approach. Requiring your suppliers to submit and disclose various ESG information on different platforms will stifle smaller organisations, as will requiring efforts to be placed much more on reporting as opposed to delivering operational change. There’s a ‘long tail’ on supply chains for insurance companies and their suppliers.
Definitions of Scope
Scope 1 emissions
This one covers the Green House Gas emissions that a company makes directly — for example while running its boilers and vehicles.
Scope 2 emissions
These are the emissions it makes indirectly – like when the electricity or energy it buys for heating and cooling buildings, is being produced on its behalf.
Scope 3 emissions
Now here’s where it gets tricky. In this category go all the emissions associated, not with the company itself, but that the organisation is indirectly responsible for, up and down its value chain. For example, from buying products from its suppliers, and from its products when customers use them. Emissions-wise, Scope 3 is nearly always the big one.
“Some areas have set and defined standards on which all organisations can align and co-operate, such as the science-based targets initiative, which can help. It’s also partly down to resources and how much the executive level leadership support ESG initiatives. ESG is challenging, it’s a moment where many are struggling to get their own house in order before looking at the bigger picture and being able to work with their supply chain.”
This is far from a reason for not acting and reaching down supply chains, says Tucker.
“Everyone in insurance needs to work together on ESG goals: insurers, brokers and suppliers.
“Taking carbon as an example, the majority of an organisation’s carbon footprint – normally around 80% – is in scope 3 with its value chain (see Scope box). Science-based targets usually work out as the Scope 3 needing to reduce by 30% by 2030. If organisations don’t work together, targets won’t be met. Not meeting publicly committed targets will bring about significant reputational risk and the danger of being associated with greenwashing and the damage this will bring in terms of losing customers and revenues.” This tallies with the survey which found that reputation among external customers was the joint top driver for validating the supply chain (see chart two).
Major insurers and their pivotal suppliers – the large loss adjusters and third party administrators – are working towards closer alignment and measurable delivery, says Oleh Melnyk, head of procurement for Allianz UK.
“Validation down the supply chain, backed up with stringent and clear certification, is a key objective. We tackle this by working with specialist companies and it is a key part of our supply chain management. It is challenging when it comes to Scope 3 suppliers. I wouldn’t say we have cracked that yet but we are getting there.” He adds they will increasingly use richer data to constantly re-validate their supply chain.
Interestingly, the survey found dependence on fossil fuels was the most important factor in terms of the ESG compliance among suppliers, with employee health and safety second and corruption scandals third (see chart three). But only half of the respondents [50%] currently validated dependence fossil fuels compared to 63.5% that validated employee health and safety (see chart four).
Suppliers across the industry, from loss adjusters to law firms, all say insurers are becoming more demanding in tender processes, with ESG credentials being increasingly scrutinised. In some areas, such as gender pay parity, there is now a wealth of readily comparable data, crucially driven by regulation (see ESG ratings box) but in other areas the data is patchy and far from consistent.
The demands of insurers are getting tougher, and cover the whole ESG agenda, says Melnyk, drawing on a wide range on external standards and regulations:
“For suppliers to comply with our sustainability standards, they must pass a solid supplier screening with newly updated supplier questions and a new Vendor Code of Conduct reflecting current and upcoming international requirements towards human rights: for example modern slavery acts in Australia and the UK and the new supply chain laws in Germany.
ESG ratings in their infancy
The lack of agreed definitions and international standards across the entire ESG agenda has hampered the development of reliable ESG ratings for insurers, as a recent analysis by Statista revealed.
Commenting on their findings, Jennifer Rudden, a research expert with Statista covering finance, real estate and insurance said
“A comparison of standardised ESG scores of the 25 largest insurance companies in the world shows significant differences between ESG score providers in many cases. The world’s largest insurer by market capitalization, Berkshire Hathaway, saw the largest range of scores, with S&P rating the company with the score of 10 out of 100 (indicating the company has a high level of ESG risk), while Sustainalytics awarded the equivalent score of 68 out of 100 (indicating a below average level of ESG risk). MSCI was somewhere in the middle, awarding a score which was the equivalent of 35.7.
“However, there was also some degree of convergence between the three ESG score providers as well. For example, all three companies awarded high ESG scores (indicating low risk) to most of the large European insurers such as Allianz, Axa, Zurich, and Generali.”
“Our group standard for procurement requires that supplier selection decisions are based on objective and transparent criteria, including carbon footprint
data. It also requires suppliers above a certain spend threshold to meet the standards set out in the Allianz Vendor Code of Conduct. This is aligned with International Labor Organization standards and the UN Global Compact.”
There is also a role for suppliers to push insurers to do better, especially as being green when it comes to claims sometimes comes with additional costs, says Graham Smart, chief commercial officer at McLarens.
He says, on major claims, his firm often presents insurers with options to use materials or processes that are more sustainable and resilient even though these can come with additional costs. Sometimes these are covered by “green clauses” that pick-up the over costs from sustainable repairs:
“They are increasing in frequency and you will certainly see them in larger bespoke commercial policies”, although it is not always about the direct costs of using sustainable materials. “Business interruption losses must be taken into account too, especially if a sustainable repair option takes longer, as they are often larger than the reinstatement costs. This also brings in the reputational dimension”.
What is currently often missing from the environmental aspects of ESG is clear-cut, agreed key performance indicators.
Smart says these are not far away and are being developed in some of the larger relationships such as those between captive insurers and TPAs.
“We have corporate customers that are very committed to their environmental agenda and this is a way of delivering it. We are actively looking at measurement and quantification solutions that will give them the opportunity to fund, or not, the sustainable repair.
“We are able to arm risk managers with data”.
One consistent plea among those charged with delivering ESG within insurers and across their supply chains is for greater collaboration.
“Sharing best practice, knowledge, and a common approach to ESG compliance would benefit the entire sector as there is often significant investment during the early stages of ESG implementation”, says Bentham.
This is starting to happen, says Melnyk: “We are sharing the best practices between us. It really isn’t about competitive advantage as green is good for all of us”
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