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Date: 08/12/2020

Title: Seamless and Efficient ESG Incorporation 

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Companies in the risk transfer market have potential to improve in realizing their ESG aspirations. What still needs to be done to incorporate ESG seamlessly and efficiently into business operations and processes?

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Companies in the risk transfer market have potential to improve in realizing their ESG aspirations.

What still needs to be done to incorporate ESG seamlessly and efficiently into business operations and processes?

Authors: Patrick Roder | Joel Smith | Diana Urbani | Nikolas Neumann | Giulio Genillard | Matthew Kirke

Our previous article described how a recent survey we conducted, in collaboration with leading ILS news provider, Artemis, revealed an interest among risk transfer market participants in embedding environmental, social, and governance (ESG) considerations into their operating models. But the survey also found a gap between the perceived importance of ESG factors and actual practice, with only a fraction of respondents indicating that they have taken action reflective of their sentiment. In this article we identify 3 key challenges that are inhibiting progress toward implementing ESG at the operational level. These only provide a glimpse of our survey findings and interpretations. To find out more, sign up to receive a download of the market study when it appears (around mid-December) or contact us directly.

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Challenge No. 1: Not Putting Your Money Where Your Mouth Is

Our survey suggests that the lack of progress in translating ESG into operations and processes starts at a very basic level with a lack of resources dedicated to the purpose. Many companies in the risk transfer market have so far neglected to create dedicated ESG roles as part of their operational set-up. As Figure 1 shows, non-dedicated ILS fund managers and insurers are better organized from a resource perspective than dedicated ILS fund managers. Reinsurers’ efforts are less organized, potentially because most do not have an ESG strategy to serve as a backbone in the first place.

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Figure 1: Median Number of People on a Dedicated ESG Team by Peer Group

Challenge No. 2: Wishy-Washy Goals and a Lack of Clarity on Own ESG Footprint

Another fundamental stumbling-block to embedding ESG at an operational level appears to be that companies lack well-defined measurable ESG goals and/or a clear idea of their own ESG footprint. Although the majority of those surveyed agree that measurable ESG goals are being set (see Figure 2), many of our survey respondents have voiced that these are currently either not defined clearly enough in ESG strategies or the goals themselves are considered unsatisfactory.

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Figure 2: Survey Results by Company Size on Whether Companies in the Risk Transfer Market Set Measurable ESG Goals

The survey also asked companies whether they were measuring their ESG footprint. Here North America has clear catch-up potential, with only 54% of companies measuring their ESG footprint versus 84% in EMEA and 100% in Asia Pacific. The more revealing question, however, turned out to be how companies are measuring their own impact – internally, using external service providers or a combination of both.

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Figure 3: Survey Results by Peer Group on Whether Companies Measure their own ESG Footprint

The approach adopted by non-dedicated ILS fund managers and insurers shows that these two peer groups assess their ESG performance more comprehensively than dedicated ILS fund managers − who mainly focus on measuring their ESG footprint internally − and reinsurers − almost 40% of whom do not assess it at all yet. There is a positive sign in that most dedicated ILS fund managers and reinsurers will be stepping up their efforts in this area by increasingly involving external parties.  We infer this because 70% of these two peer groups surveyed state that measuring ESG performance through external rating or scoring is important for their business.

Challenge No. 3: Inadequate Screening of Parties and Elements in the Risk Transfer Value Chain

90% of respondents agree that screening external parties or elements in the risk transfer value chain (e.g., covered risks or investment of collateral) for ESG criteria is important. Are they backing this sentiment up with actions?

The survey indicates that overall efforts to assess external elements do not yet cover the risk transfer value chain comprehensively. Companies primarily focus on downstream parties such as covered risks and clients when analyzing external parties for ESG adherence. This downstream focus might result from the fact that investors pay more attention to where incoming business is sourced from, and what type. This is another area that companies serious about ESG can improve in to get an accurate picture of the impact related to their interactions with external parties.

This raises two sets of challenges related to measuring ESG adherence of external parties or elements: a lack of data and disclosure, and a lack of consistency and standards. Again, the implication is that while companies in the risk transfer market have good intentions, the practical means for implementing ESG strategy are lacking.

Conclusion: Major Obstacles to Practical Implementation Still to be Overcome

The survey findings on progress in implementing ESG at the operational and process level are sobering. While the will exists, more dedicated resources, clearer defined goals, more accurate and comprehensive measurement, and better standards and data disclosure are required if companies in the risk transfer market are to achieve their stated aspirations.

Stay tuned to find out about progress in another key practical area: translating ESG factors into products in the marketplace.

Contact

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Patrick Roder

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