As one of the hottest topics in the insurance industry in recent years, corporate environmental, social and governance (ESG) matters now top the strategic agendas of senior business leaders. No doubt, finance will feel the effects of that shift. A massive amount of reporting will be necessary to satisfy new regulatory requirements, particularly relative to environmental concerns, and leaders must be ready to deal with those challenges.
But ESG is not just a compliance exercise. Rather, it is an imperative to mitigate severe risks faced by society, create long-term value and secure the future of the organization in a period of great change. The recent EY report, ESG and the future of finance in insurance, identifies why finance leaders should provide leadership in the realm of ESG.
The report is the latest in the EY Finance in insurance reimagined series, which sets out how finance leaders can embrace transformation to adopt a more holistic and cross-functional approach to financial management and drive insight-led decision-making.
The insurance industry is uniquely positioned to help individuals, businesses and communities around the world transition to a greener economy. CFOs and finance leaders can serve as forward-looking advisors to the business, an idea that is central to the EY vision of the future of finance.
Certainly, finance can provide value by generating insights to shape purpose-led ESG strategies and support their execution. And CFOs have important roles to play both internally and externally, helping to identify the greatest threats and growth opportunities associated with ESG and shaping a compelling ESG strategy to share with investors and other constituencies.
Enacting those roles and driving real change will necessitate finance leaders working on multiple fronts to align efforts across the business. Below are some of the key action items we believe should be on their agendas.
Identify and measure the impacts, including both risks and opportunities
The first task on the ESG agendas for all types of insurance leaders (i.e., not just CFOs) is to identify and model the impacts of climate change across the business. The task is enormous and ongoing, given that most insurance leaders recognize climate change as the greatest risk faced by the industry.
CFOs won’t build scenario models or run the assessments themselves, but rather provide inputs and help define materiality within integrated ESG risk frameworks as the organization looks to operationalize its key strategies.
CFOs can also help define materiality within integrated ESG risk frameworks as the organization looks to operationalize its key strategies. They should also examine the value-creation levers across operations to identify where they might help their organizations and customers make effective transitions to a greener economy.
Understand reporting requirements across jurisdictions
Understanding the varying requirements in jurisdictions around the globe, not to mention the mix of mandatory and voluntary standards, must be a top priority for finance teams. The number of ESG regulations and standards globally nearly doubled over the course of the last five years.
The financial risk disclosures from the Task Force on Climate-Related Financial Disclosures are among the most visible.
The most rigorous standards, especially for financial services organizations, have come from the EU and the UK, though the latest proposal from the U.S. Securities and Exchange Commission (SEC) is significantly more detailed than its previous guidance.
Finance leaders and teams must stay informed of the unique requirements of their key markets, as well as work to engage with regulators to help shape future standards.
Define the right strategic metrics
Measuring the impact of new policies and being able to track performance against peers and competitors are critical for managing ESG initiatives, particularly in terms of balancing short- and long-term goals.
The ESG research and active engagement with market leaders led us to identify four top-line metrics — total shareholder returns, brand value, economic net worth and return on capital — that can act as leading indicators of the efficacy of ESG strategies, as well as insurers’ ability to create long-term value.
These metrics are useful because they are pragmatic and universally accepted, creating clarity in a complex — and often confusing — reporting environment.
Further, many insurers already track and report them, with sign-offs in standard audit procedures. In other words, these are the right financial metrics to gauge performance in a world where nonfinancial metrics are also increasingly important.
Solve for data
High-quality data is indispensable for preparing to report according to emerging and existing standards, as well as to measure the organization’s performance.
Insurers must establish integrated reporting and data management capabilities based on current, complete and consistent data coupled with an agile, flexible architecture.
Such a framework will combine ESG data with revenue, cost and capital data to track sustainability initiatives and allow finance teams to think in the long term about potential risks and opportunities amid the evolving ESG landscape.
On a practical level, finance teams will build on their traditional role as data gatekeepers by providing access to data and insights as necessary. They may also advise the business about the right types of data to collect.
For instance, CFOs will engage with CROs to understand how sustainability affects liabilities measurement and solvency assessments.
Find the right talent for a strong team
The search for talent has been top of mind for leaders across the industry, and for good reason; many ESG concerns, such as decarbonization, require scarce technical knowledge and expertise.
Insurers should look to partner with external firms and outsource some data management processes and tasks, but they should also develop internal training and development programs to fill the gaps that are left.
When CFOs find partners they trust, their first priority is to tailor recommendations to their firm’s unique strategies, product portfolios, customer segments, operating models and geographic footprints. That’s true whether they are looking to devise a roadmap to operationalize ESG strategies, assess the sustainability of their own products, streamline their reporting processes or infuse ESG into an updated operating model.
Shape and share a persuasive external narrative
CFOs often serve as the public face of insurers to financial markets, investors, rating agencies and regulators. Thus, they must help shape their firm’s ESG stories for these audiences. Such narratives are also consumed by the media and general public.
At the highest level, investor stories should clarify insurers’ ESG strategies and the key metrics by which they’ll measure performance against those strategies, especially relative to future growth.
Narratives are important as investors have long found insurers’ financials to be complex and hard to understand. Adding ESG metrics could make matters worse, unless they are shared within the context of a broader narrative. CFOs should offer leadership when crafting their organization’s stories for investors, clarifying ESG strategies, risk exposures, key metrics, and broader approaches to consumer and public expectations.
AUTHORS: Frederic Pierchon – EY Insurance ESG Finance Reporting Leader