The Environmental, Social and Governance (ESG) theme continues to gain importance in the Financial Services industry. Attracting the attention from insurers and recognizing the important role of risk management, the CRO Forum recently published a paper Mind the Sustainability Gap detailing the steps required to embed the important topic of sustainability into an insurer's risk management framework. Providing a platform to discuss views and share experiences, KPMG recently organized a round table event bringing together several risk function holders from Dutch insurers. The discussion was preceded by a panel of three industry and subject matter experts, and structured by discussing a number of propositions within three domains, as captured in the CRO Forum paper:
- Governance & Strategy
- Risk Management
- Metrics, Targets & Disclosures
In this blog we would like to share the key takeaways from the discussion.
Governance & Strategy
Key takeaway 1: The maturity level towards ESG implementation within a particular company is a strong driver for addressing ESG bottom-up vs. top-down. Typically, at the beginning of embedding ESG into the company and its risk management framework, a bottom-up approach will provide required and valuable information. This is then a precursor to a deliberate top-down policy and ESG culture at a later stage. It is believed that ultimately a top-down approach is preferable to embed ESG in the organization's governance, strategy and culture.
Key takeaway 2: Although exclusion can be a powerful strategic tool for managing reputational risks, maintaining client relationships by motivation is generally viewed the best and most effective approach.
Risk Management
Key takeaway 3: For one group of insurers, ESG risks start as separately defined risks, 'isolated' from other risks in the risk taxonomy, while recognizing that risks will always be correlated. The advantage of starting in this way is that it is easier to address risks in the existing risk taxonomy, since ESG risks typically exhibit different dynamics and thus deserve special treatment. Moreover, identifying ESG risks as a 'new' risk creates awareness and makes it easier to measure the impact of risk mitigation strategies. On the other hand, insurers recognize that ESG can (or should) be seen as an additional feature to pre-existing risks in the risk taxonomy, and that these ESG features are fundamentally intertwined with the other risks, thus favoring a new approach to the existing risk taxonomy that incorporates the necessary features. Therefore, to prevent a mapping exercise at a later stage, some insurers opt to embed ESG risks immediately.
Key takeaway 4: In terms of managing ESG risks, it is important for companies to have a long-term vision rather than managing short-term risks or immediate risks such as reputational risk. Instead of managing reputational risk as a separate ESG risk, the underlying risks causing reputational risk should be identified and managed in line with the company's long-term vision.
Key takeaway 5: EIOPA's incentives to include climate-related risks in the ORSA within 1.5 years are considered a good tool to raise awareness of the topic, as are the incentives from ECB for the banking sector. These are expected to provide guidance, especially for smaller insurers, in terms of emerging methods for handling climate-related risks. On the other hand, overly detailed regulatory requirements should not be necessary and could create impediments in the case of obligations (see also the following takeaway).
Metrics, Targets & Disclosures
Key takeaway 6: For some insurers the disclosure obligations in the ORSA help to focus attention on the necessary topic. On the other hand, these obligations also carry the risk of creating a 'compliance only' attitude towards ESG. Some companies prefer to focus on the aspects that are most relevant for them in their own vision. For those companies with a strong vision, disclosures risk becoming a distraction.
Key takeaway 7: Clear and standardized disclosures (or disclosure requirements) may act as a catalyst for efficient ESG risk management and top-down strategic decision making, by providing essential data on ESG. While it is acknowledged that initial data will be incomplete and imperfect, data gathering facilitates the further development of the ESG risk management approach and enables the establishment of more powerful KPIs.
Key takeaway 8: To accelerate the path to sustainable insurance, some executives prefer to communicate ambitious goals. While this is excellent for creating momentum, at the same time, overly ambitious goals can lead to inaction due to disbelief. As the insurance industry moves towards a ESG approach, it also seeks a balanced approach to goal setting.
Conclusion
Insurers make progress in their approach to ESG. Risk managers recognize their important role on the topic. At the same time, there is still work to be done by the industry as a whole to reach the envisioned level of maturity. Have you considered these issues within your organization and planned your approach to integrating ESG?
At KPMG we support our clients, including the insurance and pension clients, in embedding ESG in their risk management framework. We strongly believe this is best achieved through a holistic learning-by-doing approach, that also takes into account business opportunities. We believe that demonstrating the added value of transforming the company into a more sustainable future helps to motivate employees to achieve the necessary compliance.
For more information, please contact Juanita de Kock-Loots or Ted van der Aalst.
