Companies across virtually every industry are increasingly encouraged to think about how they do business through the lens of their potential environmental, social and governance (ESG) impact. ESG policies are increasingly central to strategic development at an organizational, sector, regulatory and governmental level.
There is currently a challenge. As everyone strives to define their responsibilities and prove the contribution that they are making to the overall effort, they are creating a myriad of different reporting mechanisms. In some ways these different reporting mechanisms are making it difficult to ascertain the best way of moving forwards.
This is particularly true where it comes to the environmental aspects of ESG, which has particular relevance for the aviation industry as it tries to reduce carbon emissions.
In this short article, we will examine the challenges that the environmental aspects of ESG faces and briefly explain how the insurance sector can offer useful perspectives and support.
With increasing acceptance that human activity is having an impact on the Earth’s changing climate, many organizations have been trying to accurately gauge their impact, not least so that they have a baseline that enables them to report any improvements that they make.
Without a globally accepted metric that everyone can adhere to though, some organizations are looking at their impact one way and some another, while governments and regulators are analyzing the same challenges in completely different ways. According to a February 2020 report by KPMG, there are more than 150 data vendors currently offering ESG performance measures, “…each with their own proprietary definitions and methodologies on materiality, intentionality and additionality.”1
This is creating a situation where even when organizations are demonstrably trying to do the right thing, their progress is being slowed by arguments about measurement. We could be reaching a point where the sheer volume of ESG metrics is forcing organizations to spend time and resource on reporting rather than focusing on innovating and finding ways to meet the current challenges.
In some ways this risk is already becoming a reality. As we discussed in this recent article,2 governments and companies all over the world face an increasingly active and litigious set of environmental organizations. Many are trying to be proactive by changing policies before they face the risk of legal action.
The government in the Netherlands recently announced that it was reducing flight capacity at Schiphol airport as part of its ambitions to cut air and noise pollution.3 Several aviation associations have reacted to the constrictions including the International Air Transport Association,4 but making an argument based on a set of ESG metrics that are recognized by both the industry and governments could potentially lead to a far quicker resolution.
At the same time, the lack of clarity can lead to confusion, frustration, and resistance to the very concept of ESG. In recent months law makers in the state of Texas in the US have been discussing an outright ban on insurance companies that use ESG metrics in their risk assessment processes.5
There are several factors in the debates in the state legislature, but the fact that it is being discussed is a complicating factor in the development of the ESG structure, which in some ways has been created to offer a framework that brings together and simplifies responses to a complex set of challenges.
Some regulators and governments including the European Union6 and the US Securities and Exchange Commission7, are issuing opinions and consulting on ways to regulate some aspects of ESG rating organizations, but these processes tend to be slow and considered and in the meantime confusion and the potential for pushback continue to exist.
Insurance has the potential to play a strong, proactive role in the development of ESG and the potential consolidation of metrics.
01
Insurance operates across industries and the majority of its discussions are focused on risk reduction. The changing environment is having a significant impact on the nature of risk and the potential for claims, meaning that the insurance sector is directly involved at a data and interpretation level.
02
Risk professionals have a perspective on several aspects of ESG which gives them the ability to see what is working in one sector and potentially how that could be applicable to a different sector. The industry also has the capacity and experience to engage with interested parties across the world.
03
Insurance needs to respond to a plethora of global reporting expectations, all of which add to administration costs. This gives insurance a perspective that could support the validity of some metrics and potentially narrowing down the number of metrics that companies, regulators and governments are both offering and expecting adherence with.
04
Insurance is in the position to develop products that can help move us from where we are to where we need to be, and with the large portfolios of risk that the insurance sector has access to, the industry can play a role in understanding, facilitating and financing the transition to net zero by 2050.8
Ultimately, the insurance sector is in the business of understanding, assessing and responding to risk. When a risk becomes an incident, the sector needs to respond to clients’ claims. This gives the sector a unique perspective as risks emerge and the incentive to develop coverages that will assist clients with both risk mitigation and protection.
The aviation sector needs to adapt existing technologies and bring in several new technologies if it is going to meet the targets that it is setting for itself and those that are being set for it. The insurance sector can play an active role in supporting these technologies through the development, testing and sales stages.
Changing the way that industries operate to meet the challenge of climate change will involve both time and investment, and the best route to success will be focusing on areas where there is the most impact with the least distraction from day-to-day activities. The current plethora of metrics is complicating the process of finding the most efficient route through the challenges ahead.
Various governments have stated that they intend to take their economies to net zero by 2050, and it could be argued that the lack of a single global reporting standard has the potential to hold progress back. The insurance sector can play an active role with governments, regulators and businesses including aviation, as they strive to reduce their carbon impact.
1 Sustainable investing: fast-forwarding its evolution
3 Netherlands to cap Schiphol capacity from next year to lower pollution
4 Global Airline Community Challenges Legality of Mandatory Flight Reductions at Schiphol Airport
5 Lone Star 'Wake Up Call': Texas Republicans Want to Ban ESG in Insurance
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