The onslaught of ESG-related data, consultancies, and external and internal products can be cumbersome to transform into a usable strategy for investment teams, leaving many in the industry to search for the best solution.
There are ways of controlling the copious amounts of ESG data available says, Saoirse Jones, Transformation Manager, Zurich Insurance Company. When it comes to discerning the most effective tools at an organisation’s disposal to make a meaningful difference in applying decarbonisation practices, Jones said that there are multiple possible routes forward – some better than others.
"One of the fundamental discussions that we had is whether we have the same understanding of the data definition [of ESG].”
Jones spoke at the recent Insurance Asset Management DACH 2022 virtual event, hosted by Clear Path Analysis, where she discussed the challenges of ESG implementation in the German-speaking regions of Europe, as are featured in a new report.
Jones’s covered both practical applications and available ‘tools’ from a regulatory reporting perspective.
“One of the fundamental discussions that we had is whether we have the same understanding of the data definition [of ESG],” she said. “Even that is not quite clear – we speak about ESG, but what does this [term] mean exactly? We speak about Scope and CO2 emissions, but what do we include and exclude?”
Scope 1, 2, and 3 are categorised types of Greenhouse gas emissions, which are judged for accounting purposes. Scope 1 emissions include fuel combustion, company vehicles, and fugitive emissions. Scope 2 is purchased electricity, heat, steam, and other utilities. Scope 3 covers more esoteric measures such as purchased good and services, business travel, commuting patterns of employees and stakeholders due to business needs, and investments.
Jones added that further areas must be fully understood before a company can even approach necessary solutions. “When we do our reporting, what do we include and exclude in terms of not only underwriting activities but our investment portfolio?"
“As an insurance business we speak with a variety of different clients, so we have a good understanding of the risks these people and corporations face.”
She said that all needs on the underwriting side and the investment side must be identified before a common understanding can be met.
This is because while there was discussion in the industry about tools for data analysis and reporting, discussions around engagement were less prevalent but equally important, Jones said. Engagement is a uniquely effective tool to a meaningful ESG strategy. “As an insurance business we speak with a variety of different clients, so we have a good understanding of the risks these people and corporations face,” she said. “We could help and advise others through our engagement activities as to what works and doesn’t work.”
A study by United Nations Principles for Responsible Investment (UNPRI) backs this up. The research identifies engagement as a key methodology for better ESG engagement at the corporate investment level. “We found [that] companies usually favour individual forms of ESG engagement, because they make the tailoring of the engagement process to the specific needs of a given investor a lot easier,” said the UNPRI report “How ESG engagement creates value for investors and companies”.
“Investors’ specific ESG interests and needs can be more easily identifiable for one investor than for a group of investors,” it added. “An appropriate internal expert (e.g., health and safety or climate change expert) can be involved in the engagement, depending on the sophistication and degree of knowledge of the investor.”
“We need to work together with the clients and customers as well as the public sector.”
Jones agreed with these points and argued that investment teams at insurance companies should continue to share new insights to help both prospective and current clients and customers. This effort, she said, would boost involvement in existing corporate decarbonisation strategies or longer-term sustainability strategies based on the insights and know-how that the insurers have from their underwriting side and risk management insights.
“We are in this together and we cannot as a single industry make a change and reduce the risks from climate change [on our own],” she said. “We need to work together with the clients and customers as well as the public sector.”
She added that there is a lot gained when organisations engage more widely and broadly. “We have a lot of value not only from an investment perspective but also from an insurance perspective that we can bring to other people through our engagement activities, and we should continue to build that out as well.”
The need for the public sector and ESG-focused business to work together has been highlighted in recent years on both sides of the Atlantic. In the US, the Republican party have hounded businesses that embrace this push, while, in the UK, public-private partnerships and engagement are seen as key to the government’s social cohesion and living standard improvement policies.
