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How ESG strategy adds value for insurers

Oct 23, 2022

As measuring and managing risk is fundamental to the insurance industry, strategic opportunities are arising for insurers with companies increasingly working to assess and minimize their ESG risks.

For example, the proposed SEC climate rule requires public companies to disclose their ESG-related physical and transition risks. As this rule is put into effect, insurers will be relied upon to identify and alleviate risks, particularly those caused by climate, and other environmental and social factors.

In addition, as companies are committing to net-zero emissions and are encouraged to find new ways of operating, a significant amount of capital is being reallocated. Over the next several years, billions of dollars are projected to be spent on decarbonization technologies and renewable energy sources.

With the growing investment in these technologies and infrastructure, the demand for insurers to provide both standard coverage as well as adaptation and resilience support will continue to increase.

Also important for insurers to consider is the need to address their own ESG strategy. As stakeholders’ expectations continue to develop around ESG-related issues, it’s critical that insurers demonstrate they have an authentic and robust plan to drive long-term sustainability. Research has shown that taking ESG seriously strengthens relationships with business partners, helps to attract and retain employees and creates opportunities to connect with customers.

NAIC survey

Along with the proposed SEC climate rule, the National Association of Insurance Commissioners (NAIC) requires insurance companies that write more than $100 million in premiums and are located in any of the 14 participating states or the District of Columbia (representing almost 80% of the U.S. insurance market) to complete the annual Climate Risk Disclosure Survey.

New in 2022, the survey was revised to align with the international Task Force on Climate-Related Financial Disclosures (TCFD) framework. The TCFD standard is the international benchmark for climate risk disclosure and includes a nonconfidential disclosure of the insurers’ assessment and management of their climate-related risks. As a result of this change, the number of U.S. insurance companies preparing TCFD-compliant reports will grow from 28 in 2021 to approximately 400 this year.

Tax credits and tax equity investing

An important part of an organization’s ESG strategy is understanding how to embed it within its other established objectives, such as its tax targets. If properly planned, tax credits can be used to fulfill sustainability initiatives while reducing tax liability.

Insurance companies have long used tax credits from investment in renewable energy, affordable housing or new markets to reduce their tax liability while allocating dollars to much needed social and environmental initiatives. If designed properly, tax credits can also serve to satisfy ESG policy objectives.

Tax credit equity investing can also provide opportunities to corroborate ESG strategy with tax objectives. With tax credit equity investing, companies invest in specific projects, such as those noted above, in exchange for the right to claim the available tax credits. In this way, companies can quantify their ESG impact, satisfying ESG initiatives and making a measurable impact in their communities, while at the same time mitigating their tax liability.

Steps for developing a sound ESG strategy

Engage with your customers to understand their ESG expectations: Connect using surveys, roundtables and meetings to understand what’s most important to your clients and where to focus your initial efforts.

Participate in the development of industry standards: Work with government leaders, regulatory agencies, insurers and other financial service firms in a collaborative effort.

Assess issues affecting your business: Assess the current state of your organization. What is your company doing well, and where could there be improvements? Identify ESG-related risks and opportunities specific to your operating structure and firm culture. Armed with this information, examine the value creation process to understand the impact of various ESG strategies on the business.

How Wipfli can help

Determining the ESG program that’s right for you is not an easy task. If you’re interested in prioritizing and shaping your ESG strategies, Wipfli can help.

Learn more with these educational resources:

Author(s)

Sarah K. Williams, CPA
Senior Manager
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