According to a KPMG survey published in October 2024, “ESG continues to be a key focus for many insurance organizations, with 63 percent of insurance CEOs confident that they will meet Net Zero goals by 2030.” But what is ESG? ESG is a framework that measures a company’s impact via three pillars: environmental, social and governance. It aims at promoting sustainable and ethical business practices that are often overlooked by traditional financial performance metrics. According to PwC, 75% of global investors say companies should address ESG issues, with short-term sacrifice on their profitability.
ESG mandatory reporting hasn’t made its way outside of Europe yet, other than the European Union (EU) through the Sustainable Finance Disclosure Regulation (SFDR) effective January 1, 2023.
ESG requirements hit hard in the energy and industrial sectors in the EU; many companies in these sectors have claimed that the strict regulations have put European businesses at a competitive and valuation disadvantage to their U.S. peers. In the insurance sector though, there has been less backlash as many of the ESG values are seen as important to the health of insurance companies and their stakeholders. As the world becomes more ESG-conscious and with more recent regulation, there will continue to be a pressing need to build in sustainability measures and frameworks addressing ESG risks in harmonization.
What this means for actuaries:
ESG has various applications to insurance companies. For example, Swiss Re incorporates it into their underwriting by including an ESG risk assessment and underwriting referral tools for new business applications. ESG has also created opportunities for new products, such as Zurich and Aon’s new clean energy insurance facility that was stood up in July 2024.
Actuaries, particularly those in enterprise risk management, would play roles in assessing their company’s financial rating outlook relating to ESG factors, and developing the corporate strategy and business goals through an ESG lens.
Sources:
- ESG regulation in 2024: Everything you need to know [updated] (sustainability-news.net).
- https://ar.casact.org/esg-and-what-it-means-for-actuaries/.
- https://www.pwc.com/us/en/industries/financial-services/library/next-in-insurance-top-issues/esg-insurance-industry.html.
- https://kpmg.com/be/en/home/insights/2024/10/ins-kpmg-2024-insurance-ceo-outlook.html.
- https://www.insurancebusinessmag.com/us/news/environmental/zurich-and-aon-announce-new-clean-hydrogen-insurance-facility-for-netzero-transition-495351.aspx.
- https://www.insurancejournal.com/news/international/2024/09/10/792044.htm.
Sara Chen, FCAS, is a consulting actuary at Pinnacle Actuarial Resources Inc. She is a member of the AR Working Group and Writing Subgroup.
Yuhan Zhao, FCAS, is a senior actuarial manager with Aviva Insurance Company of Canada. She is news editor for the AR Working Group and a member of the Monograph Editorial Board.
