Since its launch by the United Nations (UN), the ESG (Environmental, Social and Governance) movement has grown into a global phenomenon that is reshaping the asset management and broader business landscape.
According to a recent report by The Geneva Association, despite the triumphant march of ESG, companies, investors and the public at large have struggled to grasp precisely what role the social or ‘S’ dimension, i.e. the impact of businesses on people, should play in investment and business decisions.
A 2019 Global ESG Survey by BNP Paribas found that 46% of investors surveyed considered the ‘S’ to be the most difficult to analyse and embed in investment strategies.
Unlike environmental and governance issues, social factors are less tangible and come with limited data on how they can impact a company’s performance, the report noted.
It is therefore challenging for a socially responsible investor to assess an investee company’s strengths and weaknesses in dealing with stakeholder expectations relating to, for example, working conditions, decency of pay, product safety and community impacts.
Nonetheless, there is growing stakeholder expectations for businesses to have more social impact, The Geneva Association found in its new report titled The Role of Insurance in Promoting Social Sustainability.
Social imbalances caused by the pandemic and turmoil and the war-induced turmoil in global food and energy prices, have emphasised the need for businesses to to pay more attention to the ‘S’.
Jad Ariss, Managing Director of The Geneva Association, said: “Clearly businesses need to do more to promote social sustainability, particularly in light of the repercussions of the pandemic and Russia-Ukraine war. Insurers have always been – and will continue to be – at the forefront of this agenda; the very essence of the insurance business is protecting society, providing financial security and peace of mind, and supporting recovery from shocks. That said, insurers can build out their impact in this space and need to address the absence of suitable metrics. We hope our report serves as a guide.”
The report highlighted insurance’s abundant, inherent social benefit in providing financial stability and peace of mind to people and businesses. The Geneva Association estimates that insurers contribute $5–5.5 trillion per year to global financial resilience through insurance claims and benefit payouts.
But, in order to further advance social sustainability, the report advises insurers to hone their impact underwriting and investing activities, as well as due diligence on risks linked to their clients, investees and operations, from human rights violations to algorithmic bias.
The Geneva Association report put forward an innovative framework for insurers to assess their ‘social footprint’, inspired by the Greenhouse Gas Protocol’s approach to carbon emissions disclosure.
Scope 1 is an insurer’s social impacts on its employees. Scope 2 is the insurer’s impacts on communities. This can be either, directly through its operations and indirectly through its employees.
Scope 3 is described as the most important one. It is the insurer’s social impacts across the value chain, from risk-taking and servicing to investing – upstream (value-chain partners) and downstream (customers and investees).
The Geneva Association proposed a three-pronged approach for insurers to assess their social impacts under the proposed Scope 3 analogy: the core business of underwriting and investing, i.e. the provision of risk protection and long-term investment funds (‘business as usual’).
It also includes activities enabled by the explicit integration of ESG considerations in core business activities, such as improving access to risk cover for difficult-to-insure groups; and efforts designed to avoid and address potentially negative impacts on employees, customers and communities, for example by not underwriting projects which may harm indigenous populations.