How insurers can enjoy the upside of the ESG transformation

How insurers can enjoy the upside of the ESG transformation
  • Blog post
  • November 26, 2021

Tim Braasch | Partner, Strategy& Germany

Many insurance companies are currently busy handling what is for them the downside of the transformation towards environmental sustainability. While meeting these expensive obligations, they should take care not to neglect the many revenue opportunities that this transformation will open. They should ask themselves how they can participate in the booming sustainability market and make the most of these opportunities.

Key drivers in the sustainability market

The UN sustainability agenda is having a colossal impact on governments, society and the economy, and the speed of this transformation is only accelerating. More than fifteen significant legislative initiatives have been adopted by the European Union since the beginning of 2020 alone. The authorities are acting in this way not only because of the ecological imperative, but also because of growing pressure from their populations. A 2021 PwC survey conducted in 22 countries revealed that a half of all customers say they have become more eco-friendly during the course of the COVID-19 pandemic, and are significantly more likely than in a similar PwC survey from 2019 to choose sustainable products in order to help the environment. The path to sustainability will necessarily demand massive investment. The European Commission has estimated that meeting the EU’s current 2030 climate and energy targets will require €260 billion of additional annual investment from the private and public sector.

The sheer scale of this expenditure, and the rapid development of governmental and popular support for the sustainability agenda, are bound to give rise to major commercial opportunities. However, many insurance companies are failing to identify and capitalize on these opportunities, primarily because they are currently preoccupied with mitigating the downside that they are facing from the sustainability transformation.

Much of the downside relates to claims due to physical damage from climate change. However, insurance companies are also being saddled with substantial expenditure on essential measures which may form the foundation of an Environmental, Social and Governance (ESG) strategy, but which are difficult to monetize.

Such measures, which have been widely implemented across the industry, aim to boost insurers’ own climate conduct by reducing their carbon dioxide footprint, and by introducing digital communication and insurance policies, regular reporting on the organization’s performance regarding sustainability, and appropriate employee training. These measures can be called hygiene factors either because they are simply meeting regulatory requirements, or because their absence would provoke dissatisfaction, not least among consumers.

When establishing these hygiene factors, insurance companies would be well advised to learn from best practices in other industries and anticipate changes in popular attitudes. Their ambition should stretch beyond simply following the minimum requirements. Instead, they should develop and implement a strategy that clearly reflects the values of the company and its aspired brand position.

Realizing upside opportunities

The fulfillment of these hygiene factors may entail a great deal of expense and hard work, but it is vital to insurance companies to also remain alert to the commercial potential afforded by the sustainability transformation.

In terms of their core risk management business, insurance companies can certainly profit from the increasing demand for coverage in those industries, such as photovoltaics and wind energy, which are growing rapidly in response to the appetite for greater sustainability. The exhibit below shows the recent development of the renewable energy market, a trend which is only likely to gather pace. A plethora of related industries, services and technologies which feed off environmental concerns, such as ESG consultancy and recycling, will also continue to flourish.

Climate scenarios

Providing products that allay clients’ concerns about the long-term environment future, and its impact on their respective businesses, offers another opportunity for insurance companies. Given the lack of clarity on the exact level of expected global warming in the coming decades, existing customer groups in all industries will certainly be looking for help in hedging environmental risks. The booming area of ESG investment offers a further opening for insurance companies to participate in the broader sustainability market, bringing both financial and reputational gains.

Such areas of potential growth within the core risk management business need to be identified, both for current customer portfolios and for new customers. Targets can then be set accordingly. In carrying out this process, insurers should consider their own core capabilities, determining how they can be best utilized to meet market demand.

Potential openings outside the comfort zone

Insurance companies can also capitalize on opportunities in the sustainability market which fall outside the remit of their current core business, such as consulting services on how to manage environmental risk. These additional offerings, which few insurers have yet provided, could lead to a considerable potential upside.

Industry activity and monetization potential of climate change-related measures

Clearly, the broader the range of services that insurance companies offer to customers in the growing sustainability market, the higher the possible commercial gains. However, straying far away from the core business also carries with it some degree of uncertainty and complexity.

Extracting the upside from offering these services while also managing the accompanying risk can be a difficult balance to strike. Insurers should first define the precise role they want to play in the environmental market, and then devise a strategy which is mindful of their existing capabilities. A close relationship between the projected role and existing capabilities would mitigate the risks resulting from uncertainty. If the execution of the proposed strategy relies on capabilities that the insurer does not currently possess, the company should then identify opportunities for strategic cooperation with external providers, or even pursue acquisitions.

Six steps to progress in the sustainability market

In order to take full advantage of these opportunities, insurance companies should navigate their way through six logical steps.

First, they need to address the hygiene factors, envisaging potential regulatory developments and adopting measures in response as swiftly as possible.

Second, they should set up an ESG team to plan, control and implement measures related to sustainability. It is important that the team does their utmost to enlist the support of all employees for the organization’s chosen approach to their participation in the sustainability market.

Third, insurers should analyze the customer base and market. This involves listing their main customer categories, understanding the ESG-related risks each category faces, and then creating relevant business cases to support client risk management. Business cases should reflect the insurer’s own core capabilities.

Fourth, they need to define their ESG target ambition in the emerging sustainability market. They should sketch a broad outline of the intended development of the strategy and consider how their brand identity needs to be adapted to have resonance in this new era.

Fifth, insurance companies should develop an upside strategy based on the organization’s core strengths and set out a roadmap for the measures to be taken. Resources will have to be reallocated accordingly, while acquisitions will need to be contemplated if the necessary capabilities are inadequate.

The final step is to implement and monetize the strategy, putting the roadmap into practice with a collaborative change management approach. Constant reinforcement of the defined brand positioning should accompany the arrival of the company’s new offerings to the marketplace.

Insurance companies should not let themselves get bogged down by the necessary measures they must take in response to the sustainability agenda. By adopting a more positive mindset and following these six steps towards progress, they can cease to view the growing sustainability agenda as a burden to be borne, but rather as an opportunity to embrace.  

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Tim Braasch

Tim Braasch

Partner, Strategy& Germany