With ESG concerns rapidly rising up the corporate agenda, EY’s insurance leader for Asia Pacific (APAC), Grant Peters, answers our questions on how the insurance sector’s attitude towards ESG is changing in the region
What are the central concerns of insurance executives in Asia around ESG?
ESG, and sustainability in general, is an issue that has been coming up more and more over the last 18 months. Initially, a lot of firms were thinking about it purely from a product and services perspective, asking themselves, “Do I have impact-related products on my shelf or are we offering ESG-related coverage?”
Increasingly, insurance firms are now also trying to develop and implement their own sustainability goals and understand how to align them with their stakeholders and broader community.
“We will also likely see APAC insurers revisit their operating and governance models to align their organisations on ESG imperatives, and increase the amount of engagement they have with a broader group of external stakeholders”
In many larger organisations, we’ve seen C-suite announcements about going net zero and following their purpose and we expect more and more companies to focus on communicating how their ESG and sustainability goals will manifest across the whole of the firm.
We are seeing firms now thinking about collecting sustainability and ESG preferences from their initial conversation with clients, for example, so they become more aligned.
Since the onset of Covid-19, we’ve also seen insurers reaffirm their commitments to become more socially responsible and expand ESG investments, driven in part by the pandemic’s social and economic impact.
We’ll probably see companies grow their climate change and sustainability commitments, implement decarbonisation strategies more clearly, launch new green insurance products and solutions to build resilience and close the protection gap, and integrate climate and environmental risk more closely in their underwriting and investment process.
How is the regulatory landscape evolving in the region to address environmental issues?
Many countries around the world are moving in the same direction, including in Asia where regulators are pushing more and more for insurance companies and other financial firms to focus on green finance, ESG and other sustainability-related areas.
In China, for example, the State Council has recently said it is changing the regulatory framework to help speed up the country’s low-carbon transition and bolster its green finance industry, creating systems to monitor and evaluate green finance statistics and data and develop standards for disclosure so that insurers and other firms can better assess their carbon impact and improve their risk management.
The E in ESG obviously has a huge impact in the insurance industry in many ways, particularly when you consider the effects of environmental risk from catastrophe exposure and natural disasters on reinsurers’ credit quality, for example.
We’re seeing different measures in place around the region, with regulators from Indonesia to Malaysia, Hong Kong and China moving with incentives to promote green bond issuance and sustainable finance, for example, but also imposing stricter guidelines around assessment and reporting of sustainability and climate change risks.
Do approaches to social and governance risks differ in markets across the region?
While insurers in the APAC region move to tackle the potential risks from ESG considerations on their insurance policies, they are increasingly incorporating the principles into their investment strategies. These can be different in each market because of local factors.
Social risks in the region impact more on life and health insurers because of demographic trends, such as ageing populations, changes in urbanisation or growth in wealth generation, for example.
That said, given the penetration of different insurance products in the region is considerably lower compared to US and European markets, there’s still quite a lot of opportunities for insurers to tap across APAC.
Governance of course is a big factor in many markets in the region, with a more recent focus on issues in Australia, for example. The region still has some catching up to do in areas like board independence, accountability and oversight over sustainability matters, active stewardship and public disclosures, but that is certainly improving with a more proactive stance from regulators.
What are the key steps carriers in the region must take over the next 12 months?
ESG issues have moved to the forefront of the agenda of insurers across APAC at a pace far faster than many leaders anticipated, particularly given that we are still enduring the Covid-19 pandemic. The scope and complexity of ESG require insurers to both develop holistic long-term strategies and prioritise pragmatic near-term actions.
The immediate (next 12 months) imperative for insurance leaders in the region is to assess the potential impacts of ESG and the increasing expectations from a broader group of stakeholders, including the impact on financial performance, public perception and the ability to generate value. Only then can insurers determine the breadth and depth of their response.
“Asian regulators are developing ESG and sustainability disclosure requirements that are more in line with those in Europe and the US.”
Once this initial strategic assessment has been performed, a set of enterprise-wide priorities can be defined and progress monitored. Given the pace of global change, it will be important for carriers in the region to continue to track and monitor ESG developments both in APAC and other jurisdictions, and reflect any necessary changes in their strategic response and priorities.
We will also likely see APAC insurers revisit their operating and governance models to align their organisations on ESG imperatives, and increase the amount of engagement they have with a broader group of external stakeholders.
What would you like to see change in the way ESG is currently addressed by carriers in the region?
In general, carriers across the APAC region are becoming much more aware of the scope and extent of ESG impacts, but there continues to be divergence among insurers in terms of the pace, breadth and depth of response to climate change and other social issues.
Given the insurance industry’s purpose is deeply intertwined with climate risks, physical and financial wellness, economic recovery and the threat of future pandemics, there is an opportunity for both individual carriers and the broader insurance industry in APAC to further use this purpose to guide its decision making and priorities.
Related to this, the insurance industry could benefit from further developing its thinking around the need to balance short-term performance targets with longer-term ESG goals (e.g. shifting to a net-zero economy by a certain date).
This includes common measures and disclosures that assist an increasingly complex stakeholder set to better understand the growing contribution insurers are making to longer-term sustainability objectives while still meeting acceptable shorter-term performance outcomes.
How can a clear ESG framework help enhance investor perceptions of insurers?
The efforts around ESG seem to have focused on “E” and somewhat “S” but not much on the “G”.
The insurance sector has a comparatively low valuation considering book-value multiples, and conveying ESG and related credentials can enhance the relative value of intangible assets and insurance brands.
While almost all firms have some programmes on ESG, purpose and values, corporate social responsibility and long-term value, these are often disparate with no common coherence or governance.
Therefore establishing a new reporting framework of financial performance and long-term value, based on principles of sustainable finance and inclusive of ESG, can unify the various programmes, clarify value drivers, collect appropriate data and ultimately drive better stakeholder capitalism and tell a compelling investor story – this is a direction we’d like to steer towards.
When shaping their ESG strategy, what lessons can APAC insurers learn from Americas or Europe, Middle East, India and Africa-based insurers? Conversely, what lessons can APAC insurers offer?
European insurers and asset managers are clearly further along in integrating ESG into their investment decision making and are vocal in shaping the narrative on ESG, but APAC firms operate in emerging markets – bringing jobs, economic development, wealth growth and protection to some of the world’s most needy people.
A report last year from Goldman Sachs Asset Management showed that 82 percent of insurers in APAC used ESG among several considerations when making investment decisions, up sharply from 53 percent in 2017, so clearly things can move very quickly in this part of the world when there’s a will to do so.
Asian regulators are developing ESG and sustainability disclosure requirements that are more in line with those in Europe and the US, and these regulatory developments will continue, so the adoption and integration of ESG factors into investment management in the region are likely going to be picking up pace going forward.