In the first of four articles on the role of inclusive insurance in the UN Sustainable Development Goals (SDGs) and Environmental, Social and Governance (ESG) criteria, MiN Executive Director Katharine Pulvermacher calls on insurers to ensure that their customer-base is inclusive and on stakeholders to strengthen the recognition of access to insurance in SDG targets and indicators.
At the recent Farad Finance Forum in Luxembourg, I was invited to propose what insurers should be focusing on, given the existence of both the SDGs and ESG frameworks. This is a particularly pertinent issue given that the European Commission has developed an action plan intended to integrate sustainability considerations into its financial policy framework. It affects all firms working in financial services, including insurers.
In terms of which to focus on – SDGs or ESG criteria – the short answer is both. The SDG and ESG frameworks are not mutually exclusive, but there are key differences. Most obviously, the SDGs are timebound, and the deadline for reaching the goals is 2030. ESG requirements, on the other hand, are becoming part of more permanent regulatory requirements.
Also worth considering is how we got here: where do these frameworks and goals come from?
The concept of socially responsible investment (SRI) first emerged in North America in the 1980s. Based on the concept of ‘do no harm’, SRI refrained from investing in alcohol, tobacco, the arms trade, gambling, pornography and nuclear weapons, spawning the evolution of responsible investment and later, impact investment.
Meanwhile in Europe, ESG was evolving - driven by three catalysts: a debate on the relationship between fiduciary duty and sustainability, climate change and a series of corporate governance scandals.
The fiduciary responsibility of institutional investors had traditionally been viewed as a responsibility to maximise returns regardless of any negative social or environmental impact. A 2005 report commissioned by UNEP from law firm Freshfields Bruckhaus Deringer turned that argument on its head, concluding that integrating ESG considerations into investment analysis was “clearly permissible and arguably required”. In other words, if trustees and pensions advisors did not pay attention to the sustainability practices of investee firms, they were at risk of breaching their fiduciary duty because of the long-term impact on returns.
By the late 1980s, climate change and the newly-formed IPCC were starting to focus the minds of institutional investors and insurers. Along with the Exxon Valdez oil spill - which gave rise to the Global Reporting Initiative – the climate debate brought together traditional SRI thinking with the burgeoning ESG investment movement in Europe, paving the way for disclosure frameworks such as the Sustainable Accounting Standards Board launched in 2018. The social cost of carbon (SCC) – an effort to price CO2 emissions that requires companies to disclose their impact in terms of climate risk – is one example of ESG which became particularly relevant to insurers underwriting some of those risks.
ESG was given further impetus by a series of corporate governance scandals: Enron and Arthur Andersen, Tyco, Freddie Mac, WorldCom, HealthSouth Corp, AIG, Satyam, Lehman Brothers and Bernie Madoff among them. For insurers managing large investment portfolios, the conventional wisdom at the time was that a trade-off existed between financial returns and respect for ESG. The corporate governance scandals – along with pressure from responsible investors and climate action – was turned on its head in 2010, when the American Securities and Exchange Commission (SEC) required exposure to climate risk be included in company disclosures, intended to provide investors with full information about material risks facing investee firms.
Into this mix came the UNEP Principles for Sustainable Insurance (PSI) in 2012, driven by experts such as Butch Bacani and Dr. Astrid Zwick who now heads up InsuResilience Global Partnership. The four principles repeatedly talk about ESG, but perhaps because they originated as part of UNEP’s Finance Initiative, the emphasis has tended to be on green sustainability – the ‘E’ in ESG. Social sustainability has in practice focused on the treatment of employees and diversity. Champions such as Pranav Prashad of the ILO’s Impact Insurance Facility engaged with the process of developing the Principles in an effort to draw attention to the need for insurers also to focus on delivering insurance that would meet the needs of the unserved and underserved (microinsurance), but this aspect has remained marginal at best and is usually invisible in the interpretation of what compliance with the principles means in practice.
This is why the MiN wants to put the ‘S’ back into ESG. Social sustainability is intrinsically connected to mitigating the impact of climate change, which hits hardest precisely those people who are most often not insured: low-income households and businesses in low-income countries, particularly in V20 countries. Noting that around three out of four people on planet Earth do not have any form of insurance, one action that insurers could certainly focus on to meet the S criteria in ESG would be to diversify their product portfolios to meet the needs of customers who are currently excluded and are extremely vulnerable to climate change. This criterion is not currently included in ESG ratings – and there certainly is no standardised set of criteria … yet, creating an opportunity to ensure that the point does not get overlooked.
Just three years after the UNEP PSI, the SDGs were launched in 2015. Unlike the Millennium Development Goals (MDGs) which focused on developing countries, the SDGs stress the interdependence of all countries and partnerships which leave no-one behind. It’s a far more complex model, with 169 targets (compared to 21 MDG targets) and 231 indicators (compared to 60). Unfortunately, insurance did indeed get left behind. Although several of the goals – particularly 1, 2, 3, 5, 8 & 13 – are only achievable through the use of insurance and risk management tools, insurance is mentioned just once in the targets and not at all in the indicators. It’s a similar story for ‘risk’ and ‘resilience’. Since the indicators and targets undergo an annual review, perhaps there is scope to change this so that the indicators defined to measure the achievement of target 8.10 include access to insurance as well as access to banking. Let’s remember that if you don’t measure it, it doesn’t exist, to paraphrase Peter Drucker. And based on previous experience with funding that supported the achievement of the MDGs, this could seriously impact donor appetite to fund inclusive insurance market development.
We encourage our members and supporters of our vision of a world where insurance serves to build the resilience of low-income households and MSMEs to call on the UN to update the SDG targets and indicators so that they more appropriately reflect the value that insurance and risk management tools can, and should, bring to the 2030 development agenda.
We’ve come a long way since SRI first emerged four decades ago. The SDGs are increasingly seen as an opportunity for affirmative action through responsible investing and corporate behaviour. The goals can help align insurers’ specific ESG actions with global societal and environmental goals. It is now possible to map the ESG and SDG frameworks to connect the paths to a sustainable future.