Since its launch by the United Nations (UN), the ESG (environmental, social and governance) movement has become a global phenomenon that is reshaping asset management and the broader business landscape.
According to a recent report by The Geneva Association, despite the triumphant march of ESG, companies, investors and the general public are struggling to understand precisely what role the social or “S” dimension, i.e. the impact of companies on people, should play into investment and business decisions.
A 2019 global ESG survey conducted by BNP Paribas revealed that 46% of investors surveyed considered the “S” to be the most difficult to analyze and integrate into investment strategies.
Unlike environmental and governance issues, social factors are less tangible and come with limited data on how they can impact a company’s performance, the report notes.
It is therefore difficult for a socially responsible investor to assess the strengths and weaknesses of a recipient company in managing stakeholder expectations regarding, for example, working conditions, decent wages, product safety and community impacts.
Nevertheless, stakeholders are increasingly expecting companies to have more social impact, the Geneva Association found in its new report titled The Role of Insurance in Promoting Social Sustainability.
The social imbalances caused by the pandemic and the war-induced turmoil and upheavals in global food and energy prices have underscored the need for businesses to pay more
pay attention to the “S”.
Jad Ariss, Managing Director of the Geneva Association, said: “It is clear that companies need to do more to promote social sustainability, especially in light of the repercussions of the pandemic and the Russian-Ukrainian war. Insurers have always been – and will continue to be – at the forefront of this agenda; the very essence of the insurance business is to protect society, provide financial security and peace of mind, and support recovery from shocks. That said, insurers can strengthen their impact in this space and need to address the lack of appropriate measures. We hope that our report will serve as a guide.
The report highlighted the abundant inherent social benefit of insurance in terms of financial stability and peace of mind for individuals and businesses. The Geneva Association estimates that insurers contribute $5-5.5 trillion annually to global financial resilience through insurance claims and benefit payments.
But, in order to further advance social sustainability, the report advises insurers to refine their underwriting and impact investing activities, as well as due diligence on the risks related to their clients, holdings and operations, from human rights violations to algorithmic biases.
In its report, the Geneva Association report proposed an innovative framework for insurers to assess their “social footprint”, inspired by the Greenhouse Gas Protocol’s approach to carbon emissions disclosure.
Scope 1 corresponds to the social impacts of an insurer on its employees. Scope 2 is the insurer’s impact on communities. This can either be directly through its operations and indirectly through its employees.
Scope 3 is described as the most important. These are the social impacts of the insurer along the entire value chain, from risk taking and servicing to investing – upstream (value chain partners) and downstream (customers and beneficiaries).
The Geneva Association has proposed a three-pronged approach for insurers to assess their social impacts under the proposed analogy with Scope 3: the core business of underwriting and investing, c i.e. the provision of risk protection and long-term (“business as usual”) investment funds.
It also includes activities enabled by the explicit integration of ESG considerations into core business, such as improving access to risk coverage for hard-to-insure groups; and efforts to avoid and address potentially negative impacts on employees, customers and communities, for example by not agreeing to projects that may harm indigenous peoples.
Report author Kai-Uwe Schanz, Deputy Managing Director and Director of Socio-Economic Resilience at the Geneva Association, said: “The report recommends that insurers take a three-tiered approach to managing sustainability. social. First, to maximize the intrinsically positive social impacts of insurance; second, to protect those benefits by carefully mitigating potentially negative impacts; and, third, exploring opportunities for commercially viable additional social benefits.
“Based on this approach, we believe that insurers can further strengthen their role in providing socially relevant products and working to fill gaps in protection. This is more important than ever because the transition to a net zero economy must be socially just and inclusive.