Environmental, social, and governance (ESG) has always been a major topic for insurers, reinsurers and insurance linked securities (ILS) providers, given that their core business centers on managing risks and help to finance responses to disasters. Due to accelerated climate as well as demographic change, it’s expected to become an even more critical success factor in the future. Many market participants are no longer just incorporating ESG into their investment considerations, but into their overall business operations. Key drivers for this development are investor demand, reputation and risk management. The market agrees that ESG is an important topic. However, the integration of ESG is still in the early stages. There is still a lot of potential in further operationalising ESG from which market participants can benefit in the future. These are the findings of a market survey, conducted by the international management consulting company Synpulse in collaboration with the leading ILS news provider Artemis.
The study's objective was to determine how much institutional investors, dedicated and non-dedicated ILS fund managers, insurers, reinsurers, and managers of risk transfer markets across 41 companies in Europe, the Middle East and Africa (EMEA), North America, including Bermuda (NA), and Asia Pacific (APAC) have incorporated environmental, social, and governance (ESG) considerations into their business practices. The structure of the survey followed a dedicated ESG framework, built by Synpulse based on project experience and market research to help companies to incorporate ESG in their business model and execute it in a holistic approach. In their study Synpulse and Artemis analysed the factors strategy, culture and principles, processes and operations, services & products as well as training & communication accordingly, with the following outcome:
 Synpulse defines dedicated ILS fund managers as those that specialise in managing ILS assets and for which ILS is a major asset class whereas non-dedicated ILS fund managers are defined as those managing ILS among other asset classes. No differentiation is made in the study between independent and affiliated (e.g., with a bank as parent company) dedicated ILS fund managers.
The actions taken by companies in terms of implementing an integrated ESG strategy do not currently match the perceived importance of ESG.
Survey respondents indicate that ESG is a major topic in the risk transfer market and is expected to become a critical success factor in the future. Investor demand, reputation, and risk management are key drivers of ESG. The reality today, however, is that ESG is still in the early stages of application, as respondents indicated that most implemented ESG strategies are considered ineffective. Key areas of improvement include implementing a framework more thoroughly and sustainably, defining tangible ESG key performance indicators (KPIs) and measurable ESG goals as well as enabling target-oriented external and internal ESG reporting.
There is interest in embedding ESG into operating models across the risk transfer market. There is still work to be done, until ESG is seamlessly and efficiently incorporated in companies’ business operations and processes.
In terms of operations, dedicated ESG roles are not yet commonplace in all companies in the risk transfer market. Among the peer groups surveyed, non-dedicated ILS fund managers and insurers appear best organised from a resource perspective. Measurable ESG goals are currently either not defined clearly enough, or the goals themselves are considered unsatisfactory. When it comes to assessing a company’s ESG footprint, companies in NA haven’t yet embraced its relevance as fully as their peers in EMEA and APAC.
Participants primarily focus on covered risks and sponsors/cedents  when analysing external parties or elements of the risk transfer value chain for ESG adherence. Tools used for these assessments have been widely adopted in the market. However, the majority of respondents say that improvement is needed. The two key challenges identified by respondents are lack of data and disclosure as well as lack of consistency and standards.
 In the insurance industry, the ceding company is the insurer or reinsurer that cedes shares of the risks it insures or reinsures to a reinsurer or retrocessionaire in return for a premium.
Most survey participants state that they offer ESG-friendly insurance services & products. However, only a small fraction of fund managers offers ESG-friendly investment products.
Integrating ESG into underwriting standards and guidelines helps steer ESG compliance during the underwriting process, a practice adopted by most survey participants. Most insurance products currently offered in the market by survey participants target the social aspect of ESG, placing less emphasis on environmental and governance factors. In contrast, most surveyed fund managers do not offer specific ESG-friendly investment products, although the majority consider integrating ESG into their investment product offering to be important. Most survey respondents follow a sustainable investment approach, with exclusion (e.g., excluding sectors and/or products based on ESG criteria) being the most adopted.
 Many fund managers stated in their responses that they generally see the ILS asset class as inherently ESG friendly, arguing that investing in increasing resilience amongst the population must be deemed inherently ESG friendly. The authors of this study agree that the ILS asset class has a head-start over other asset classes. However, the authors also argue that while the features of the ILS asset class are a necessary condition, they are not a sufficient condition. For example, providing flood coverage to a company investing in the protection of a coal power plant or a factory permitting child labor cannot be seen as ESG friendly.
There is a disconnect between the perceived importance of ESG training and the degree to which it is offered. Insurers are the only peer group that reports extensively on any ESG KPIs.
Almost all survey respondents see training as integral to creating awareness of ESG topics, but almost half do not offer any training at present. ESG trainings held currently cover a wide range of topics, generally including elements from all three aspects of ESG, such as diversity & inclusion, respectful workplace, climate change and governance. The majority of respondents communicate their ESG strategy and/or targets externally as well as internally, which shows that many could still gain more trust with their customers by increasing transparency.
Only a minority of participants report on ESG KPIs. Carbon footprint, volunteer work, diversity & inclusion, and governance & policy adherence are presently considered the most impactful ESG KPIs.
Patrick Roder, Associate Partner and Global Head of ILS at Synpulse says: “For market participants in the risk transfer market there are great opportunities in investing in the topic of ESG. Given the growing importance of ESG, driven by investor interest and risk management considerations, it is promising for market players to scale up their ESG activities in 2021 and beyond. An individual assessment is needed to precisely define the focus for development, but despite these differences, we believe that an overall ESG framework can serve as a guide to enable companies to understand ESG holistically from strategy definition to operationalisation.”
Synpulse is an internationally established management consulting company and a valued partner to many financial services providers of all sizes, worldwide. Since its establishment in 1996, the consulting company has been supporting its clients along the entire value chain, from the development of strategies and their operational realisation through technical implementation. Synpulse stands out thanks to its profound industry know-how as well as the passion and commitment of its 500 employees. Headquartered in Zurich, Switzerland, Synpulse’s presence includes offices in Geneva, Dusseldorf, Frankfurt, Bratislava, Vienna, Sydney, Singapore, Hong Kong, Manila, New York, London and Hyderabad. For more information about Synpulse, please visit www.synpulse.com. For more information on the ILS practice, please visit the Synpulse information platform The Magazine.
Artemis was originally launched in 1999 but had been tracking the development of the catastrophe bond market since 1996. As the most widely read source of news, analysis, data, and information on ILS, Artemis tracked the development of ILS and its evolution into an asset class increasingly seen to have ESG-appropriate values and qualities. Artemis also hosts international in-person and virtual conferences, produces regular market reports, hosts executive roundtables, and facilitates networking events.
For more information, please visit www.artemis.bm.