As a concept strongly linked to sustainability, ESG is an increasingly relevant topic among all sectors of society and business, who seek to respond and find solutions to sustainability challenges the world is facing. Controlling over USD35 trillion of assets under management, the insurance industry plays an equally-with-other-stakeholders role in promoting change in terms of economic, social and environmental sustainability.
The advantages for organizations taking engaging in ESG involves, from managing reputation risks to developing a better understanding of the financial benefits of clients with strong ESG performance. Meanwhile, as companies around the world strive to support the UN Sustainable Development Goals (SDGs), an active ESG approach can be a source of engagement for employees in an increasingly challenging market.
The concept of ESG
Launched as a concept along with the Principles for Responsible Investment Initiative (PRI) in 2005, ESG stands for Environmental, Social and Governance factors assessing the progress of companies on their Corporate Social Responsibility. More specifically:
- Environment: The adverse effects of climate change have made green sustainability is a growingly relevant topic for business globally. In maritime specifically, ESG reporting covers topics such as GHG emissions, recycling, waste management, energy efficiency, etc.
- Society: This pillar covers business ethics and a wide range of societal obligations, varying from human rights, diversity, labor standards, animal welfare, to the hot issues for shipping of adherence to workplace health and safety with accident and safety management.
- Governance: This has to do with a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of the companies.
This means ESG helps companies’ social efforts to be quantifiable, so more easily measured. More specifically, ESG describes the criteria that investors use to evaluate a company and determine if they are worth investing in.
The principles for sustainable insurance
In 2012, the UN Environmental Programme Financial Initiative launched the four Principles for Sustainable Insurance, including a list of possible actions. These provide a global framework for the insurance industry on how to manage ESG issues, and strengthen its contribution to building resilient, inclusive and sustainable communities and economies:
#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.
According to IUMI, over 120 organizations worldwide have adopted the four Principles for Sustainable Insurance, including insurers representing more than 25% of world premium volume. Meanwhile, the first guide for the global insurance industry to manage ESG risks, developed by UN Environment Programme’s Principles for Sustainable Insurance initiative (PSI), was launched in early June 2020.
Some ESG issues, such as climate change, require efforts from the entire industry. Working together as an industry to raise awareness of the importance of ESG issues and to support clients in managing them will play an increasingly important role in the future
…the PSI ESG Guide reads.
ESG and marine insurance
Amid the growing importance of green sustainability in shipping, the marine insurance industry is embracing the ESG. A change in public awareness initiated by the UN SDGs, the Paris Agreement or the work of IMO has led to increased expectations with regard to insurers’ responsibilities, said Lars Lange, IUMI Secretary General.
For example, a hot topic at the moment, that is expected to last also in the near future, is the GHG emissions from shipping. The finance and chartering sectors are already monitoring emissions performance of ships, through the Poseidon Principles and the Sea Cargo Charter, respectively.
In line with this, the International Union of Marine Insurers (IUMI) is now considering its own scheme. During IUMI’s annual conference in 2021, policy committee director Helle Hammer shared her hopes for an insurance industry emissions monitoring scheme, where marine insurers will request emissions data of customer companies, in the same way that banks are operating under the Poseidon Principles.
Another attractive trend is the one of alternative fuels, which creates endless discussions regarding their safety (see ammonia), efficiency (see hydrogen), availability of infrastructure (see LNG) and others. The risky nature of the new technologies constitute another important factor that marine insurers will have to take into account.
IUMI has already recognized several topics where ESG principles already have an impact, such as sanctions and polar shipping. Other topics currently under consideration include human rights insurance clauses, illegal fishing, conflict minerals or anti-bribery. Environmental issues are already on IUMI’s agenda such as ballast water management systems for ships or the IMO 2020 sulphur cap.
The increasingly relevant role of the environment and ESG stresses the need for the shipping sector to guide the marine insurance industry in dealing with ESG topics.
The growing pressure and urgency across all sectors of society to respond and find solutions to sustainability challenges made insurance companies understand that they have a responsibility for these factors beyond their core traditional businesses. These insurance companies work on a better understanding and overarching principles for the underwriting of environmental, social and governance risks, in short ESG risks
…notes Mr. Lange.
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