How the insurance sector is meeting ESG challenges
How the insurance sector is meeting ESG challenges
Thu 04 Mar 2021
|This article is part of the series covering the impact of sustainable finance on the insurance sector. Read further:|
Part 1: Assessing the impact of sustainable finance on insurance entities
Part 3: Developing a toolkit for responsible investment decisions
When taking environmental, social, and long-term asset portfolio issues into consideration, insurance companies must assess the specific risks they face. As a result, the associated obligations of transparency mean that the entities concerned must adapt their risk management policies.
We have seen that market players incorporating ESG factors into their investment strategy also need to adapt their governance and review their risk management procedures accordingly. But it is essential to recognise that because the business model of insurance companies is broad, they are impacted in several ways.
Firstly, insurers represent a significant group of private investors. Their central role in wealth creation and financing the economy is one of the main reasons why the European project for financing sustainable growth directly impacts the industry.
Compliance with ESG transparency regulations directly impacts how insurance companies organise their governance and how strategic decisions are taken. It is important to remember that companies can create a strong internal culture of sustainability by integrating an ESG strategy throughout the entire decision-making process,
A direct impact on investment policy
It is also of note that the regulations on the transparency of ESG disclosures have a direct bearing on investment policy. This means that, in addition to the technical impacts of reviewing investment policy, organisational procedures and processes need to be reviewed as a whole. Beyond its internal organisation, the integration of ESG criteria into an insurance company’s investment strategy also calls for a review of asset managers chosen by institutional investors.
As an institutional investor, an insurance company is bound by strict obligations in its asset management decisions and is fully accountable to its investors for the results. Within insurance companies, the integration of ESG issues into investment choices profoundly impacts the processes concerned.
Quality reporting on an investment company’s investment strategy helps to build firm public confidence in the commitments given. Even if it is the driving force behind mainstream sustainable finance, investment policy cannot achieve its objectives without a risk management policy appropriate to the issues at stake.
A designer and distributor of insurance products
In addition to responsibilities as an institutional investor, an insurance company is at the forefront of the investment process for individuals, households and enterprises, supporting them from the cradle to the grave. This is why, through the financial products it designs and distributes, insurance companies’ activity is critical to the future direction of savings in our societies.
By changing the duty of transparency required, the Insurance Distribution Directive (IDD)1 directly impacts the contractual relationship insurance product designers and distributors have with their customers.
So whether through the obligation to integrate socially responsible investment into the products offered to customers or through the need for more product transparency, there is no doubt that the design and distribution of insurance products are directly affected by sustainability issues.
Investors should be better informed about the direction they wish their investments to take, reflecting their risk sensitivity and their preferences for responsible investment. This is why, when the decision is taken to design an ESG insurance product, insurance companies must strengthen their relationship with stakeholders and publish information that is clear, fair, and appropriate to the specific nature of these products throughout the product life cycle.
It is only by meeting such ESG challenges that insurance companies can assess the specific risks they face and act accordingly.
1. The purpose of the Insurance Distribution Directive (IDD) is to strengthen consumer protection between information, appropriate advice, competent and reputable staff, etc. To this end, obligations under the IDD, where they relate to insurance products backed by ESG financial securities, are directly affected by the relevant reporting regulations. On 30 April 2019, EIOPA issued Technical Advice on the integration of ESG risks when complying with obligations under the IDD.
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