As one of the hottest topics in the insurance industry in recent years, corporate environmental, social and governance (ESG) matters now top the strategic agendas of senior business leaders. No doubt, finance will feel the effects of that shift. A massive amount of reporting will be necessary to satisfy new regulatory requirements, particularly relative to environmental concerns, and leaders must be ready to deal with those challenges.
But ESG is not just a compliance exercise. Rather, it is an imperative to mitigate severe risks faced by society, create long-term value and secure the future of the organization in a period of great change. The recent EY report, ESG and the future of finance in insurance (pdf), identifies why finance leaders should provide leadership in the realm of ESG. The report is the latest in the EY Finance in insurance reimagined series, which sets out how finance leaders can embrace transformation to adopt a more holistic and cross-functional approach to financial management and drive insight-led decision-making.
The insurance industry is uniquely positioned to help individuals, businesses and communities around the world transition to a greener economy. CFOs and finance leaders can serve as forward-looking advisors to the business, an idea that is central to the EY vision of the future of finance. Certainly, finance can provide value by generating insights to shape purpose-led ESG strategies and support their execution. And CFOs have important roles to play both internally and externally, helping to identify the greatest threats and growth opportunities associated with ESG and shaping a compelling ESG strategy to share with investors and other constituencies.
Enacting those roles and driving real change will necessitate finance leaders working on multiple fronts to align efforts across the business. Below are some of the key action items we believe should be on their agendas.
Identify and measure the impacts, including both risks and opportunities
The first task on the ESG agendas for all types of insurance leaders (i.e., not just CFOs) is to identify and model the impacts of climate change across the business. The task is enormous and ongoing, given that most insurance leaders recognize climate change as the greatest risk faced by the industry.
CFOs won’t build scenario models or run the assessments themselves, but rather provide inputs and help define materiality within integrated ESG risk frameworks as the organization looks to operationalize its key strategies. CFOs can also help define materiality within integrated ESG risk frameworks as the organization looks to operationalize its key strategies. They should also examine the value-creation levers across operations to identify where they might help their organizations and customers make effective transitions to a greener economy.
Understand reporting requirements across jurisdictions
Understanding the varying requirements in jurisdictions around the globe, not to mention the mix of mandatory and voluntary standards, must be a top priority for finance teams. The number of ESG regulations and standards globally nearly doubled over the course of the last five years. The financial risk disclosures from the Task Force on Climate-Related Financial Disclosures are among the most visible.
The most rigorous standards, especially for financial services organizations, have come from the EU and the UK, though the latest proposal from the U.S. Securities and Exchange Commission (SEC) is significantly more detailed than its previous guidance. Finance leaders and teams must stay informed of the unique requirements of their key markets, as well as work to engage with regulators to help shape future standards.