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Why insurers should follow a risk appetite approach to ESG

Global speciality insurer Chaucer Group has committed to net-zero greenhouse gas emissions by 2050. The insurer and reinsurer is among a growing number of insurance companies who are using ESG (environmental, social and governance) standards to guide their business practices.  

Increasingly, governments are requiring ESG reporting, and customers and investors are demanding proof that insurers toe the line. In fact, PwC research found that 83% of consumers believe companies should be actively shaping ESG best practices 

While the insurance industry has long incorporated the impact of environmental and social factors into underwriting models, the question remains: How should insurers account for ESG considerations in their overall corporate risk assessment process, and how can risk assessments help insurers determine which ESG initiatives to pursue? 

Insurers can no longer afford to stay on the sidelines 

ESG reporting requirements are getting more stringent. Government agencies in the US, UK, Australia and other countries have been directed to revise disclosure regulations, particularly focusing on sustainability and diversity.  

Plus, the impacts of risk events related to ESG are becoming more serious: reputational damage, lawsuits, and fines may result from poor governance, unfair labour practices, environmentally unfriendly policies, or unethically sourced supplies.  

For the insurance industry, waiting to implement ESG practices until they’re required by law could force a company to make hasty plans with little preparation, costing more money in the long term. 

The right ESG initiatives can help insurers thrive 

However, there’s good news. ESG programs can help insurers succeed. Companies performing well in ESG tend to do better financially and lower their probability of experiencing damaging controversies, lawsuits, or regulatory fines.  

The increasing customer and investor awareness of ESG gives insurers who make changes now a competitive edge over those who wait, and experienced and talented job seekers are more interested than ever in working for a company with strong ESG practices. But how can insurers determine the best way to proceed? 

Risk appetite helps determine the best ESG initiatives to pursue 

ESG plans should conform to an insurer’s unique culture and business model. This means using risk assessments to help determine the most beneficial ESG projects for you. Instead of treating risk as a negative, approach it as a valuable resource for identifying initiatives that support corporate objectives.  

If the organisation’s leadership has a good consensus on overall risk appetite, they can identify ESG projects that lie within risk tolerance and will build long term value. For example, reducing or eliminating investment in fossil fuel companies may come with too great a risk to financial health. Increasing community engagement or lowering the company’s carbon footprint may lie inside risk tolerance and build long-term reputational value.  

Having identified palatable options, insurers can then pursue projects that fall in line with the corporate mission and offer the best benefit-cost ratio. 

A holistic approach improves the effectiveness of managing ESG risk  

Whether an insurer carries out ESG projects or not, leaderships still needs to understand and manage risks associated with ESG issues, such as labour standards, sustainable investments, and fraud prevention. As good practice, ESG risk measurement and assessment should be part of overall risk management and stress testing. And because ESG risks are relevant to all of an insurer’s operations, a siloed risk assessment process will not capture the full picture. 

For the most effective ESG risk management, insurers should take a holistic approach, integrating risk information from all business units into a single data source for more comprehensive analysis. All levels of management and staff take ownership for risk awareness. And risk management is integrated into everyday decisions, so it becomes a way of doing business rather than an isolated concern for experts. 


If you want to know more about risk management in the enterprise, our Enterprise Risk Management: Moving from a Siloed to a True Enterprise Approach webinar is available for you to watch on demand. Register and view the webinar here. 


About the author

Terence Lee is the Vice President of Sales for North America. Terence ("Terry") joined Protecht in 2022 to facilitate the growth of the NA market, bringing extensive experience in governance, risk, compliance, and incident management. Terry has led sales, product, and marketing teams at risk and compliance software vendors in the past, and is a recognized expert in ERM, vendor risk, business continuity, regulatory change management, and resilience.