EY’s Santenac: Crucial the sector strives for inclusion in ESG indices

The global (re)insurance industry must do more to bolster its climate credentials, with inclusion in accredited ESG indices and ratings seen as being increasingly important by both policyholders and investors, according to EY’s global insurance leader Isabelle Santenac.

Speaking to The Insurer TV, Santenac warned that insurers are lagging behind their peers in financial services and other sectors in terms of ESG ratings and inclusion in ESG indices.

She said insurers must work to raise their ESG ratings and secure inclusion in “rapidly growing index funds”, despite “legitimate concerns” about their proliferation and underlying methodologies.

“According to EY analysis, 50 out of 66 insurers in the MSCI World are excluded from MSCI World SRI due to low ratings while eight out of 23 insurers in the S&P 500 were excluded from S&P 500 ESG due to an average ESG score which is too low,” Santenac explained in the latest edition of Close Quarter.

“More progress has to be made on that front,” she continued.

Participation in indices has historically had a positive impact on total shareholder return and share price over time, but Santenac says inclusion would also demonstrate to stakeholders a firm’s progress on net zero and commitment to aid policyholders in their own transition.

Santenac noted that the cost of natural disasters is “exponentially increasing” with natural catastrophe economic impacts totalling $268bn in 2020, only $98bn of which was covered by insurers.

She said it was clear the insurance industry cannot cover this risk by itself but said the solution cannot be for the sector to walk away and leave society unprotected.

Instead, Santenac urged (re)insurers to use their role as large institutional investors to fund more resilient infrastructure and partner with governments to build effective risk management against the impacts of climate change and natural disasters.

“As large institutional investors, insurers can allocate capital to companies and sectors looking to innovate for a more sustainable economy. They can direct their investments toward climate resilience efforts, potentially mitigating claims and safeguarding customers,” Santenac explained.

She continued: “The insurance industry is a major investor, so they could direct part of the investment to finance those projects. But this requires insurers to think bigger and differently in engaging with governments, their peers in other sectors and other stakeholders such as real estate developers and infrastructure operators.

“It will take time to identify the right partnership and move them forward in a meaningful

way, but it is critical that the industry acts as a catalyst on this.”

And it is not only the sector’s financial muscle that will be necessary. Santenac said insurers must not underestimate the role the industry must play in proactively educating society and customers about the risks related to ESG factors.

“People, but also cities and governments, need to be conscious of the increasing damage being caused due to climate change. They must take measures such as the prevention of people rebuilding homes in a place very exposed to natural catastrophes. Otherwise the assets will become uninsurable or only insurable at a cost which is unaffordable,” she said, adding that the sector must also communicate to policymakers where its ability to offer cover ends.

“Without this education, there is a risk that the industry will be forced by governments to deliver protection at the wrong price,” she warned.