Legal
Cytonn Photography | Unsplash intensive businesses in the short term , with no plan to transition , will leave a power generation void , particularly in developing countries . It will also strand that workforce and leave them without family-sustaining wages .”
Andersen explained that none of the private , public and social sectors can get to net-zero without the help of the others . He identified a need to collectively create the conditions that leverage the talent and creativity of the best scientists , engineers , technologists and inventors , and which provide the opportunity to create a financial return . “ This combination will require a market to measure , price and transfer risk .”
Aon ’ s experience in the market is that carbon-intensive clients need to conduct separate and comprehensive presentations on their ESG initiatives to ensure that their efforts are properly recognised by carriers . Fundamentally , these presentations have the ability to change an Insurer ’ s viewpoint if they move away from tick-box approaches and demonstrate real value from an underwriting perspective . For example :
• Detailed long-term strategies to lower carbon emissions .
• Environmental improvement projects such as solar and other renewable endeavours , green buildings , reforestation and so on .
• Detailed rehabilitation plans in the mining sector .
SOCIAL COMPONENT While environmental and governance issues are easier to define , the ‘ social ’ component of ESG is imminently more challenging to encapsulate , covering a litany of issues from socially ethical business practices ; workforce policies , supplier relationships , and the extent to which they invest in their local community . Social issues that have translated to actual reported claims in the directors & officers liability space include :
• Diversity and Inclusion
• Human Rights
• Working Conditions
• Corporate Social Investment
Could ‘ social ’ ultimately be the element that stems the withdrawal by Insurers from risk on the basis of a poor ‘ environment ’ score if it is in turn balanced by a strong social position ? Does a lack of insurability for these sectors then translate into a negative social score for insurers ?
When looking at developing countries and their dependencies not only on coal from a power generation perspective , but also from a wider mining industry viewpoint , one cannot ignore the huge role that they play in community outreach , public schooling , local medical services and social development . It is notable to mention that while mining risks generally score poorly on the environmental aspect of ESG , if we look at the South African context of “ S ” there has been no other industry sector more proactive and effective
in the vaccination drive against COVID-19 than the mining industry , not only for their own employees , but for the broader communities in which they operate .
So , could this mean that a negative ‘ E ’ score is offset by a positive ‘ S ’ score where the impact is so profound ?
GOVERNANCE COMPONENT The governance component relates back to the strength of the board of directors and supervision of the company , as well as how close it is to its stakeholders versus a management-only focus on company direction .
Looking at what Insurers are extracting from an ESG review , governance is probably the best understood . While it has traditionally been regarded as only of concern to the D & O liability line of business , there are now increasingly calls from multiple lines of insurance business , including cyber and general liability , to demonstrate strong leadership and governance practices .
ESG REPORTING AS A TRUE RISK DIFFERENTIATOR Just as we want Insurers to look at the concept of ESG holistically and not allow a single component to render a client risk uninsurable , it ’ s equally important that business leaders do not treat the important issues of ESG as a mere tick-box exercise . There are numerous examples of forward-thinking companies that have published their ESG reports as independent documents or supplements within their annual reports . They recognise that for these statements to have a meaningful impact on an insurer ’ s willingness to provide capacity , their ESG reporting needs to stand up to intense scrutiny .
Reporting on ESG policies , practices and metrics communicates how well , or how poorly , a company is managing ESG risks and opportunities , demonstrates commitment to the environment and society , and manages shareholder expectations . When executed well , a company ’ s ESG strategy should highlight an interdependent value chain among stakeholders .
When one looks into the context of mergers and acquisitions , there is no doubt that ESG and financial due diligence now carries equal weight and goes far beyond box-ticking . At the same time , ESG risks are undeniably difficult to measure and quantify amidst ever-changing goalposts in the context of climate action and constant market shifts .
Meredith Jones , Aon ’ s Global Head of ESG , explained it best when she said that a first step to gaining clarity is to start thinking about ESG in terms of materiality – that is , the impact those practices have on the company ’ s financial condition . “ There are many corporates that still confuse ESG with ‘ being nice ’, when they should think of it more from the standpoint of enterprise risk management and potential value creation .” RACA
www . refrigerationandaircon . co . za RACA Journal I November 2022 49