Article
12 Apr 2021

Insurance and ESG: A natural partnership?

Global Insights
Contributor(s): Citi Global Insights
We summarize a recent note by Citi Research Analyst, James Shuck on the ESG concerns in the insurance industry. He argues that insurance companies are one of the few whose business model has an entirely positive impact on society. He demonstrates that while insurance business models are already closely aligned with the UN Sustainable Development Goals, many firms are developing innovative products to deepen this connection.

If you were to list sectors compatible with ESG goals, you probably wouldn’t think of insurance. However, James Shuck argues that the business model of insurance firms aligns with the UN Sustainable Development Goals (SDGs): insurance is predicated on risk transfer and this allows the sector to play a central role in achieving global goals.

In particular, the insurance industry is well positioned to help with transferring climate risk, narrowing savings gaps, including the retirement savings gap, addressing increasing healthcare costs using wearable technology, and leading the carbon transition. This allows insurance companies to align with the following seven of the UN SDGs: 1) no poverty, 2) good health, 3) renewable energy, 4) good jobs and economic growth, 5) innovation and infrastructure, 6) climate action, and 7) partnership for goals. Figure 1 correlates these seven goals with actions taken and commitments made by insurers.

Figure 1. Sample insurers core business model alignment with SDGs

Source: Company data, Citi Research

 

The first, second and fourth of these are achieved by the business model of insurance firms: insurance helps to stabilize local economies and provide protection for the financial wellbeing of both individuals and businesses. Health insurance products can also innovate to encourage the wellbeing of policy holders, taking broader action on delivering good health to the communities they serve than just funding healthcare.

Moreover, insurers are large employers, with those in James’s sample employing more than 500,000 staff between them. This delivers good jobs but also opens insurers up to advancing the SGDs on gender equality, including targeting a greater proportion of women in management, and responsible consumption, including targets for emissions reductions in their buildings.

On climate action, James notes that insurers have also stepped up their “focus on renewable energy, low carbon and impact investing”. Insurers have committed not to finance additional coal business models and to sell down existing holdings. Many have made additional commitments in line with the Paris Agreement, taking steps with interim targets towards carbon neutrality by 2050. In particular, Zurich has gone further than restricting carbon intensive business models by beginning a detailed mapping to understand the carbon footprint of its underwriting contributions.  

Insurers are also aligning their business priorities with ESG standards: for example, L&G announced at its 2020 Capital Markets Day that it would target ~5% of group profit from ESG activities. As part of this, insurance product offerings can also be brought into line with ESG goals: James gives the example of “risk transfer solutions designed for farmers who are adopting sustainable practices that regenerate soil health and sequester carbon”.

Finally, ESG governance is becoming a hot topic in the sector and this has led to a number of companies incorporating sustainability and responsibility roles and committees at board level. ESG factors are also increasingly linked to management compensation, though the details on the links are sparse for now. Currently, the biographies of board members do not highlight sustainability experience, but James notes that 1) this does not mean board members do not have experience in the field, and 2) companies may begin to highlight this going forwards.

For more information on this subject, please see: Western Europe Insurance - ESG in Insurance: Build it and they will come. How ESG fund flow could double shareholder demand.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation.It is not investment research. The comments expressed herein are summaries and/or views on selected thematic content from a Citi Research report. For the full CGI disclosure, click here.

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