How to get ESG planning off the ground
Natural disasters caused $35 billion worth of insured losses in the first half of 2022. For good reason, environmentalists are concerned about the increased frequency and severity of extreme weather events — and so are insurers and insureds.
Global warming has wreaked significant physical and financial damage as a result of storms, floods, droughts, heat waves and other environmental events. As I write this, Hurricane Ian is devastating communities in its path and destroying property. For businesses, the swell in extreme weather circumstances not only poses challenges to maintaining day-to-day operations, but also makes it more difficult to obtain appropriate insurance policies. Elevated risks, higher-than-usual claims payouts and additional opportunities for litigation have added new dynamics into traditional insurance relationships.
To remain appealing prospects for future insurance policies, businesses must incorporate climate factors into their risk management framework. This undertaking is now possible with digital tools that capture data on a range of climate factors to pinpoint risks and opportunities while enabling data-driven decision-making.
The risk of climate change to insurance relationships
It’s easy to understand the high-level impacts of climate change on the insurance world, but it’s not always obvious how deeply the consequences run.
In the food and agricultural sector, heat and drought negatively affect a farmer’s yield. Not only does this detract from the farmer’s bottom line as fewer crops are sold in the market, but it also results in more frequent insurance losses and higher premium rates.
At the same time, there’s a growing preference among consumers to prioritize sustainability and purchase from businesses that align with their values. So, there’s a reputational risk for carriers associated with resource-intensive companies, making it even more difficult for organizations — and our farmers — to access adequate insurance policies as they struggle to reduce environmental impact and hit climate benchmarks. From top to bottom, environmental factors stress business operations and insurance relationships.
Currently, many organizations struggle to identify and act on these climate concerns. This disconnect often results from a Technology gap. While businesses understand the need to improve their environmental, social and governance practices, they lack the data collection tools to follow through on this critical initiative. In fact, only 19% of companies currently use digital Technology to help understand climate change risks — so it’s no surprise that nearly three quarters (72%) of senior decision-makers lack confidence in the ESG data currently being reported to stakeholders.
Organizations have started to take climate risks seriously in theory, and now they need to invest in the Technology to prove it. Otherwise, businesses risk higher premiums — or worse, insurers won’t offer them coverage at all.
How to navigate the initial stages of your ESG initiatives
While the majority of organizations are still in the early stages of ESG planning, climate factors should be an essential part of every company’s risk management framework — from deciding where to open a new location to determining source materials for products.
Data collection and management are crucial elements to the ESG assessment process. Here are three steps to make progress on your initial climate risk assessment and goals:
1. Establish a baseline and key metrics
To better understand your current climate risks and practices that may make your business less attractive to insurers, start with an evaluation of your ongoing risks. Determining which factors are most material to your business establishes a risk baseline you can refer back to and measure against. For example, an agricultural company sourcing rice from India needs to understand how rising temperatures and severe droughts will impact supply chain resiliency. Without these foundational insights, it’s extremely difficult to ascertain — and ideally reduce — risk.
Next, identify the metrics most meaningful to your benchmarks moving forward. Ask yourself what other organizations in your industry report on and what frameworks business leaders use to measure progress. It can prove useful to analyze public-facing sustainability reports from your competitors to uncover the topics they actively report on.
2. Implement a climate risk framework
There’s no one-size-fits-all climate risk framework. Organizations have different constituencies, including investors, clients and other external stakeholders — yours included.
Each group relevant to your business may have a preference for a specific framework. In determining which framework makes sense for your organization, consider materiality as well as physical and operational risk and goals. It’s perfectly acceptable to leverage more than one framework. Incorporating multiple frameworks can be beneficial — or even necessary — to accommodate the varied needs and interests of different parties across your organization.
3.Lean on data and analytics
Once you’ve established key metrics and a framework for tracking data, benchmark your findings against your baselines. You can analyze trends that measure your organization’s progress toward its goals and communicate this information to current and future insurers. Set specific targets to stay on track. Common ESG risk factors you may want to monitor include:
- Land management
- Water use
- Waste management
- Emissions tracking
- Energy use
- Health and safety
- Inclusion and diversity
- Human rights
- Fair labor practices
- Community engagement
- Corporate governance
- Organizational transparency
With so many factors to evaluate, it’s helpful to implement advanced data and analytics tools and automate this process. These solutions aid in the collection, tracking and analysis of data and reduce administrative burdens, making sure your business is prepared to communicate and showcase your ESG rigor to carriers.
When it comes to reducing climate risks and maintaining positive relationships with insurance providers, establishing a baseline is a priority. From there, you can periodically conduct materiality assessments to ensure the sustainability risks and opportunities you’ve identified are still relevant to both internal and external stakeholders. You’ll need to continually monitor your baselines and make adjustments in real time as new climate events emerge — but let Technology help make the job easier.
As your knowledge of climate change evolves, your ESG practices and goals should be capable of doing the same.