In a mini roundtable with Risk & Compliance magazine, Graham Handy and Darko Popovic from FTI Consulting’s Global Insurance Services team discuss the growing importance of sustainability for the insurance sector, as well as the key risks and opportunities.
R&C: To what extent are sustainability issues now firmly on the insurance industry’s radar? Why has it climbed the boardroom agenda in recent years?
Handy: Sustainability is now being regularly discussed by boards as a key part of the corporate strategic agenda – in particular, around the suitability of the investment portfolio, and for which client types, if any, the insurer might wish to reduce its exposure. One key accelerant in the last 18 to 24 months has been the inbound interest that customers, or partners, have shown in the industry’s environmental, social and governance (ESG) footprint. Pension trustees – when looking to transfer liabilities to insurers – are now asking substantive questions as part of their selection process. And retail customers, perhaps for the first time, are contacting their insurer to ask about the uses to which their money is being put.
R&C: To what extent are regulatory initiatives driving sustainability-related measures for insurers? What recent developments have you observed?
Handy: While we are seeing insurance companies embrace sustainability for what they see as good solid commercial sense, there is a limit to how far and how fast a private enterprise will move. It helps that regulators are setting explicit and timebound objectives, which form a catalyst for action that the private sector might generally wish to take but cannot take in isolation from competitors. Some of the regulatory and legislative changes, particularly the European Union (EU) Sustainable Finance Disclosure Regulation (SFDR), are serving to bring a collective focus on data quality, which needs to be addressed if financial services firms are to confidently put sustainability at the heart of their business processes. The upswell in compulsory requirements has also contributed to a deeper take-up of voluntary commitments that have been an option for some time – for instance, more companies are signing up to the UN Principles for Responsible Investment (PRI).
R&C: What key risks and opportunities related to sustainability do insurance companies need to consider?
Handy: There are undoubtedly big opportunities ahead. Given the sheer scale and pace of change that sustainable economies are going to require, smart and forward-thinking companies should be able to find a valuable role to play – and the insurance industry has always found a way to support that kind of change. That said, there is substantial execution risk as the changes to policy and decision making are complex. There is communication risk – sometimes the best of intentions can be misinterpreted. And there is a risk that governments backpedal or move out of alignment with each other. There will be some major consequences over the next 20-plus years for large parts of society, and it would be unfortunate for the financial services industry to be painted as the enemy.
This article has been reprinted with kind permission from Risk & Compliance magazine.