ESG In Insurance: How to Keep Up With The Risk?

by | Dec 7, 2023 | ESG, Sustainability, Sustainable Finance

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Insurance companies, the second-largest asset owner group behind pension funds, are projected to be essential in transitioning to a greener economy. They can not only drive change through responsible operations and asset allocation, but they can also encourage other enterprises and individuals by underwriting with environmental, social, and governmental (ESG) insurance considerations in mind. Because of regulatory factors in different jurisdictions, insurance clients are at differing stages of ESG maturity.

ESG in the Insurance Industry

Let’s have a look at the principles for ESG in insurance considerations & some ESG risks for insurers:

Principles for ESG in Insurance Considerations

As ESG concerns become widely investigated by investors and customers alike, insurers must handle them inside their businesses to contribute to long-term economic and social development while protecting their brands and reputations. The UN Environment Programme Finance Initiative (UNEP FI)  Principles for Sustainable Insurance (PSI) are a relevant framework to investigate in this area. It contends that the new risks and opportunities provided by ESG issues necessitate changing the risk variables that insurers assess when operating their businesses.

It defines sustainable insurance as “a strategic approach in which every operation in the insurance value chain, like interactions with stakeholders, are carried out in a responsible and forward-thinking manner by identifying, assessing, managing, and tracking risks and opportunities related to environmental, social, and governance issues.” “The goal of sustainable insurance is to minimize risk, create creative approaches, enhance the efficiency of businesses, and contribute to the environmental, social, and economic sustainability.”

Considerations for ESG Risk for Insurers

As interest in ESG grows, insurers must address the implications for risk management and strategy. There is a reputational risk that an insurer is not perceived as ecologically and socially concerned, and a reputational event showcasing its practices leads to significant increases in lapse rates and decreases in new business. Firms may also face legal action if they fail to behave appropriately and according to expectations. This could be especially troublesome if a company’s behaviour contradicts its outward statements to policyholders and shareholders. Integrating ESG problems into the business may necessitate broad cultural adjustments throughout the organization to guarantee that its behaviour reflects its outwardly declared standards.

In terms of long-term business with investment characteristics, insurers face product shortages if they fail to meet policyholder demand for ESG fund options or policyholder expectations of thorough diligence on investments made. While this risk is most likely to affect products where policyholders make investment decisions (such as unit-linked and pension savings products) in the medium term, we may see this spread over time to policyholders becoming more aware of the assets held by insurers to back other product types.

From the insurer’s standpoint, there may be an opportunity cost if individuals in charge of investments must examine new investment options in green initiatives with high growth potential. However, there may be a limit to the extent to which such investments will likely be a good fit for insurance responsibilities. If such investments are made, they should be made only under conditions in which they are fully understood and suitable risk management procedures are in place.

Climate change is a critical ESG concern, and one key challenge confronting enterprises in a climate-aware market is the impact of shifting opinions of a corporation based on its disclosure, which can directly influence the firm’s value. Insurers with investments in companies with bad ESG or climate-related PR may experience a similar impact on their portfolio values.

Finally, positively screening companies and investments will likely result in more extraordinary expenses for individuals making investment decisions. As a result, there may be ramifications for customers in terms of value for money, or insurers may need help to adhere to any charge restrictions that are in place.

ESG in Insurance: Risk Management

Over the years, the sector has faced various significant problems, the most recent of which is addressing ESG and climate-related risks. The good news is that the industry is ahead of the curve in implementing ESG measurement into its entire risk management practice. Assessing the impact of climate change, which has been swift, catastrophic, and all-encompassing than anyone could have predicted, has been infamously tricky. It will be difficult but not impossible.

A Task Force on Climate-related Financial Disclosures (TCFD) was set up by the Financial Stability Board (FSB) to enhance and expand the reporting of climate-related financial information in four essential financial sectors: managing assets, asset owners, banks, and insurance.

Like other finance industry sectors, insurers can and do play an essential role in solving the climate change challenge. They have a unique ability to regulate and influence their client companies, which is especially important given that ESG and climate-related risks are becoming increasingly important for insurers as losses rise. In most cases, insurers and their clients confront three types of climate-related risks and opportunities:

  • Physical concerns are associated with increased frequency and severity of extreme weather events.
  • Transition risks are caused by the transition to a low-carbon economy and the resulting structural changes in the underlying economy.
  • Litigation concerns associated with climate change.

What Actions Can Insurers Take to Keep Up with the Risk?

Effective risk management actions are listed below:

1. Recognise underlying risks within their client base

Insurers require complete visibility into their client base’s exposures to physical, transitional, and litigation risks. This is frequently a difficult and time-consuming operation, but it is critical to maintain total visibility of ESG and climate-related risks and exposures.

2. Examine the underlying client exposures critically

Once insurers are entirely aware of underlying exposures, they may make better-educated decisions about the risks they are willing to accept. Being exposed to particular industries raises the question of whether it is in their best interests to remain in these businesses.

These businesses typically drive and worsen climate change (GHG-sensitive industries such as coal, oil and gas, chemicals, and associated industries). This technique also helps to select clients in lower-risk businesses. For example, offering coverage for clean-green energy sources entails less risk for an insurance seller because there is no chance of catastrophic oil spills, explosions, or other intrinsic dangers.

3. Recognize the ESG or climate-related risks

An ESG in insurance risk assessment or initial evaluation can help an organization identify ESG or climate-related risks and opportunities and provide a path for navigating the ESG or climate-related risk environment.

4. Seek opportunities to improve underwriting decisions

Insurers can obtain a competitive edge by requiring examinations or evaluations of their existing and prospective clients. This allows the underwriter to make more informed, and thus better, selections. Concurrently, it gives a blueprint for addressing the client or future organization’s ESG or climate-related risk landscape.

5. Creating a solid ESG risk framework

Organizations might consider responsible risk management practices that follow recognized principles in addition to completing ESG Risk Assessments or Initial Evaluations. Whether such risk management processes include TCFD, COSO, or another risk framework, the result will likely be improved risk governance and more finely tuned ESG and climate-related strategies, leading to better underwriting outcomes that benefit the underwriter and the client.

ESG Investments for Long-term Insurance Products

ESG Investments for Long-term Insurance Products

ESG is especially relevant in insurance policies with a long-term investment component, primarily unit-linked and pension savings products, and profit plans to a lesser extent. Given the growing popularity of ESG funds and the fact that unit-linked investors share the market risk associated with their investments, it is increasingly likely that unit-linked providers will be forced to include ESG fund choices in their product offers.

We know only a few providers now offer funds deliberately marketed and labelled as ESG funds. However, some insurers are establishing rules for their investment managers regarding ESG factors. Standard Life, for example, has made its policy on incorporating ESG into its unit-linked investments available online. The policy expects investment managers to:

  • Have rules on how they interact, report, and vote on ESG and any sectors or activities they specifically exclude from funds.
  • Be mindful of how legislative changes would affect exposure to investments.
  • Demonstrate how ESG factors are included in their investment procedures.
  • Proactively interact with businesses, for example, by using voting rights to encourage positive behaviour and reporting on their voting and engagements.

Similarly, some unit-linked providers disclose the extent to which fund managers consider ESG in insurance concerns when making investment decisions.

Also Read: What Do ESG Investors Do?


Given the growing importance of such issues, insurers must pay attention to ESG factors in today’s market. As customer demand is more influenced by sustainability and as regulatory awareness of this area rises, insurers must ensure that their opinions on ESG issues are explicit and that their strategies, product designs, and day-to-day business management are aligned with them. This will become increasingly critical for brand and reputation preservation and remaining competitive as customer demand evolves.

ESG issues represent multiple risks to insurers. Thus, insurers should be clear on their ESG risk appetites and approaches to controlling this risk exposure, just as they should be clear on other risk types. The insurance industry is investigating firms’ risk appetite for the closely connected developing risk of climate change through implementing particular disclosure rules and scenario testing suggestions, among other things. While ESG encompasses a broader range of issues, including social and governance concerns as well as other environmental concerns, the paths that insurers take to embed climate change risk could serve as helpful reference points as ESG-specific exposure to risk is investigated further within the insurance industry, going beyond investments alone. While ESG issues will increase the regulatory burden for insurers and create chances, they can also provide significant potential if appropriately managed inside the business and successfully implemented into product design.

Also Read: Best ESG Mutual Funds To Invest In 2023


Q1. What exactly is ESG risk insurance?

Identifying, comprehending, and managing risks are fundamental to the insurance sector. The environmental, social, and governance (ESG) risk profile is a feature that has only lately found its way into risk analysis in the industrial insurance segment.

Q2. How do you assess ESG risk?

Identifying ESG risks can be difficult, requiring asking the proper questions, prioritizing critical issues/impacts, and leveraging data automation technology. Organizations may make educated decisions based on correct information if they understand how to identify ESG risks appropriately.

Q3. What are some ESG risk examples?

ESG risks include adaptation and mitigation of climate change, environmental management practices and responsibility of care, labour secure conditions, adherence to human rights, anti-bribery and misconduct prosecutions, and following the relevant laws and regulations.

Also Read: What Are ESG Funds? Are These Investments Worthy?



  • Farhan Khan

    Farhan is an accomplished Sustainability Consultant with 6-7 years of experience, He specializes in the design and execution of innovative sustainability strategies that not only mitigate environmental impact but also foster social responsibility, thereby enhancing overall business performance. With hands-on experience in ESG and BRSR reporting, as well as a wide array of assessments including gap, baseline, midline, impact, and value chain across various regions in India, Farhan brings a strategic and comprehensive approach to sustainability initiatives.

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