How Insurers are Contributing to Social Sustainability? Role of Insurance in ESG

Drivers of the growing importance of social sustainability
How insurers are contributing to social sustainability?
A framework for social sustainability

The ESG movement has grown from a corporate social responsibility initiative launched by the UN into a global phenomenon that is reshaping the asset management and the broader business landscape.

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 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. This lack of understanding has become even more apparent with the recent shift of ESG dynamics towards the ‘S’, driven by the pandemic and war in Ukraine and their global socio-economic implications.

Insurers play a critical role in promoting social sustainability and advancing Environmental, Social, and Governance (ESG) goals. Their contributions span across multiple dimensions, from providing financial protection and risk management to actively participating in sustainable investments and social initiatives.

How Insurers are Contributing to Social Sustainability? Role of Insurance in ESG

A significant portion of respondents have already developed responsible investment policies and implemented tools to address ESG risks and opportunities during the investment process. Around 72% of PE firms now routinely screen target companies for ESG factors before acquisition. The survey also highlights a growing trend towards using ESG to create sustainable value for both investors and society. Factors such as climate risk, decarbonization, and social equity have become central to many firms’ strategies

Nonetheless, there is a broad consensus that businesses, including the insurance industry, will have to pay more attention to the ‘S’.

With the adoption of the UN’s Sustainable Development Goals (SDGs) in 2015, there is growing pressure and urgency across society to respond to the social sustainability challenges the world is facing. This is particularly relevant for the insurance industry – as risk takers, promoters of loss and risk prevention, and long-term investors – which is widely recognised as inherently socially beneficial.

The pandemic affected low- and lower-middle-income countries disproportionately, pushing about 100m people around the globe into extreme poverty. It has also highlighted the need to push forward even more resolutely with sustainability initiatives such as the UN’s 2030 Agenda for Sustainable Development and its 17 SDGs.

In addition, Russia’s invasion of Ukraine has sparked significant rises in energy and food prices at a time when developing countries are still struggling to recover from the economic, fiscal and social fallout from the pandemic.

The war is threatening to derail progress towards achieving the SDGs and could push another estimated 40 million into extreme poverty.

Governments increasingly use regulation to improve the information available to stakeholders about corporate social activities, in the hope that they will effectively reward or punish firms, primarily in their capacity as investors.

The social objectives of national and regional regulatory frameworks are often inspired by the UN’s SDGs and the need to mobilise capital at scale for sustainable development.

Finally, investors are increasingly aware of the potential for social sustainability to maximise long-term shareholder value. Academic researchers found evidence that special focus on social factors such as human capital management, workforce diversity and supply chain due diligence can help generate alpha, i.e., excess returns earned on an investment above the benchmark return.

Against this backdrop, insurers are starting to explore the scope for generating additional social benefits, beyond their inherent social utility, from explicitly adopting ESG considerations in their core business activities.

One example is impact underwriting. This enables insurers, consistently with actuarial risk-based principles, to make specific contributions to social objectives by applying their data and risk expertise to the particular benefit of unserved or underserved groups.

Also, insurers increasingly view risk prevention in the bigger context of ESG, contributing to climate, cyber or health risk prevention and mitigation at both the individual and societal levels. Another example is impact investing, through which insurers intentionally pursue a specific and measurable social impact at a financial return commensurate with the project’s risk.

In addition to providing benefits to social sustainability, insurers need to avoid and address potential risks that may arise from their core business activities.

In the P&C business, ESG risks primarily lie with industrial and commercial insurance, potentially related to child labour, forced labour, forced resettlement, poor worker safety and violation of worker rights.

In life and health insurance they include algorithmic underwriting (e.g., the risk of unintentionally excluding certain customers). In view of these risks, insurers have established mechanisms of mitigation. On the investment side, ESG risk is managed through exclusion or negative screening of business activities, e.g., coal mining, tobacco, gambling and certain weapons, or those with human rights violations. In addition, engaging with investee companies is gaining in importance.

Despite these initiatives and measures as well as mounting stakeholder pressure on businesses to embrace the ‘S’, a decision-useful, conceptual framework that captures the insurance industry’s contributions to social sustainability is still non-existent. We aim to close this gap by offering a systematic approach to assessing an insurer‘s impact on its employees, value-chain partners, customers and communities. The suggested approach draws on the Greenhouse Gas (GHG) Protocol’s well-established Three Scope model of carbon emissions disclosure.

Scope 1 could capture an insurer’s social impacts on everything the company directly controls, first and foremost its employees.

Scope 2 could cover the insurer’s impact on communities, directly through its operations and indirectly through its employees (e.g., employee volunteering).

Scope 3 would include the insurer’s social impacts across the value chain, from risk taking and servicing to investing, both upstream (the ‘S’ impact on and of value-chain partners) and downstream (the ‘S’ impact on and of customers and investees). Scope 3 impacts are by far the biggest.

Adopt a three-tier approach to managing social sustainability. First, maximise positive social impacts arising from the core business of insurance (inherent benefits); second, protect those benefits by carefully mitigating potentially negative impacts; and third, explore the scope for additional, commercially viable social benefits which do not adversely affect tiers one and two.
Review current business models with a view to shifting from pure risk transfer to a blend of risk transfer and prevention in order to build healthier, safer, more resilient and more economically productive societies. In addition, business models should allow for commercially viable, inclusive insurance enabled by low-cost digital distribution and end-to-end processing, coupled with underwriting on a portfolio basis (i.e., across various lines of business).
Adapt core business operations by incorporating social considerations – both risks and opportunities – in daily operations, addressing the lack of trust as a major factor behind protection gaps and exploring public-private partnerships as a promising route to providing insurance products with substantial social benefits.
Build governance for the ‘S’ by embedding social considerations in decision-making at the top of the company (board of directors, executive committee), promoting diversity and inclusion in the board of directors and senior management, including the ‘S’ in operational risk governance, appointing senior ‘practitioners’ as ESG market leads and linking top management compensation to performance against social sustainability-related targets.

Here’s an overview of how insurers are contributing to social sustainability and their role in ESG:

Financial Protection and Risk Mitigation

Access to Insurance: By offering accessible and affordable insurance products, insurers provide financial protection to individuals and businesses, helping to reduce inequality and support vulnerable populations. Microinsurance initiatives in developing countries are particularly impactful, offering low-income communities coverage against life’s uncertainties.
Disaster Resilience: Insurers promote social sustainability by helping communities recover from natural disasters and other crises. They offer policies that cover health, property, and livelihoods, enabling quicker recovery and reducing the long-term social impact of such events.

Sustainable Investments

Impact Investing: Insurers manage large investment portfolios, and by directing capital towards socially responsible and sustainable ventures, they contribute to positive societal outcomes. This includes investing in renewable energy, affordable housing, and infrastructure that supports underserved communities.
ESG Integration: Many insurers are incorporating ESG criteria into their investment strategies, which means evaluating environmental, social, and governance factors when making investment decisions. This approach promotes sustainability and encourages businesses to adopt responsible practices.

Promoting Diversity, Equity, and Inclusion (DEI)

Internal Policies: Insurers are increasingly adopting DEI policies within their own organizations, promoting diversity in leadership and throughout their workforce. This supports a more equitable society and sets a standard for other industries to follow.
Community Engagement: Insurers also engage with their local communities through outreach programs, charitable initiatives, and partnerships with non-profit organizations to promote social sustainability. These efforts often focus on education, financial literacy, and support for disadvantaged groups.

Innovative Products and Services

Sustainable Insurance Products: Insurers are developing new products that align with ESG goals, such as green insurance policies that support environmental sustainability, or health insurance products that incentivize wellness and preventive care.
Social Impact Insurance: Products like social impact bonds and insurance for social enterprises help fund projects that directly contribute to social sustainability, such as poverty alleviation and public health initiatives.

Influencing Corporate Behavior

Underwriting Policies: Insurers are using their underwriting policies to promote ESG principles. For instance, some insurers refuse to underwrite businesses involved in high-risk environmental practices or those with poor human rights records. This puts pressure on corporations to adopt more sustainable and socially responsible practices.
Advocacy and Thought Leadership: Many insurers engage in advocacy and thought leadership by promoting ESG issues within the industry and beyond. They collaborate with governments, regulatory bodies, and other stakeholders to shape policies that advance social sustainability goals.

Addressing Climate Risk: Insurers are increasingly focused on managing climate-related risks, which have significant social implications. By assessing and pricing these risks accurately, they can promote climate resilience and encourage businesses to adopt practices that mitigate environmental damage, protecting communities from adverse climate impacts.
Social Risk Assessment: Insurers assess social risks, such as human rights abuses, labor issues, and inequality, when underwriting policies. This encourages companies to consider the social impact of their operations and supply chains.

Insurers contribute to social sustainability through their core business activities—providing financial protection, promoting diversity, and integrating ESG into their operations and investments.

By influencing corporate behavior, supporting sustainable investments, and developing innovative products, they play a vital role in advancing social and environmental goals while fostering a more equitable and resilient society.

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AUTHOR: Dr Kai-Uwe Schanz – Deputy Managing Director and Head of Research & Foresight The Geneva Association