Legal
ESG : TICK-BOX EXERCISE OR A TRUE RISK DIFFERENTIATOR ?
By Alicia Goosen , chief broking officer and Angela Jack , business unit head - financial services group at Aon South Africa
Although not new , environmental , social and governance ( ESG ) issues have become a key focus in the last 18-24 months , in part driven by growing awareness of environmental and equity and inclusion issues , as well as the health and wellness impacts of COVID-19 .
The events of 2020 highlighted how ESG issues can become financial risks overnight . In a nutshell , ESG is the consideration of material environmental , social and governance risks and opportunities alongside traditional financial factors . It is increasingly a major factor used to assess the long-term viability , resilience and financial prospects of an organisation , and is also increasingly influencing the capital and insurance markets .
WHAT DOES ESG MEAN FROM AN INSURANCE AND RISK MANAGEMENT PERSPECTIVE ? ESG is gaining increasing focus in the underwriting community with many carriers having signed up to the Paris accords . Initiatives to become carbon-neutral mean that ESG is increasingly being focused on . Generally , insurers have made much progress in understanding the physical risk implications of climate change and broader climate and ESG issues , but the gap between how the road to net zero will be enabled by underwriting activities remains to be closed .
The underwriting considerations are so much wider as insurers need to review risk across a corporation ’ s entire ESG stance - the potential for huge reputational risks emanating from a significant environmental or social disaster are top of mind here – consider for example the Brumadinho tailings dam disaster in Brazil a few years ago . Brazil ' s worst industrial accident sent millions of tons of toxic waste gushing into the surrounding area , destroying the rural village of Córrego do Feijão , in the state of Minas Gerais in south-eastern Brazil , killing 270 people and devastating agriculture in the region .
Today , reinsurers , like Munich Re as one example , have environmentalists on their board of directors . Several companies have investors who actively ensure that the companies they invest in are proactive and robust in their ESG stance .
ENVIRONMENTAL COMPONENT The environmental component encompasses the impact that a company has on the environment - both positively and negatively . The most common considerations here are climate change and greenhouse emissions . From a South African standpoint , the complexity of the environmental element of ESG is best articulated in our coal environment .
In 2015 , the insurance market first became impacted by thermal coal policies when most of the European insurers signed up to the Paris Agreement . This triggered a harsh decline in capacity as most global insurers were swift to exit the coal sector , with 30 % plus revenue coming from thermal coal . More recently , the American and Australian carriers issued their own thermal coal policies .
With the rapid and large decrease in capacity , premiums and rates have increased exponentially , with those insurers still able to deploy capacity acutely aware that this capacity comes at a big premium . In addition , it also has the ability to impact insurers ’ own ESG profile . As a result , what was initially anticipated to be a gradual withdrawal from the sector in fact turned into an immediate disruption with more than 50 % of local capacity lost in the past 12 months alone . The loss of capacity is not limited to just one line of insurance but is also impacting multiple lines including property damage and most liability insurance classes .
Eric Anderson , Aon ’ s President , presenting on this issue recently in Bermuda , articulated it best when he said that carbonintensive businesses need support from the insurance sector to transition , rather than being abandoned .
“ In order to decarbonise , we need massive investments in new technology and new resources , both public and private . That capital will require protection , so walking away from carbon-
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RACA Journal I November 2022 www . refrigerationandaircon . co . za