Organizations that demonstrate commitment to advancing environmental, social and governance initiatives are not only gaining favor with employees and customers — they also represent better risks for insurance companies. ESG programs are useful in evaluating companies against their peer groups, especially for consumers and investors that seek to support businesses on the basis of environmental and social policies. These differentiators are attracting greater interest from The Hartford and other insurance companies because they can signal an improved risk profile. For underwriters, the No. 1 area to review is the risk factors that public companies must disclose under SEC rules. More specifically, underwriters want to understand how those risk factors will impact the business. For private companies, underwriters have to dig deeper for details. Taking steps to embed ESG considerations into underwriting strategies and identifying methods for the development of ESG-specific products is one way that organizations are evolving. Having a better understanding of how to incorporate ESG principles into underwriting practices and product development with a particular interest in supporting a transition to a low-carbon economy strengthens a business's opportunity to mitigate risk and enable resiliency. Key questions include: What goals are they setting for their organizations and how they are planning on meeting those goals? As an example, severe weather due to climate change may shut down a transportation company's facilities in a given region. With ice on roadways, the company's trucks, or those of its suppliers, may be unable to deliver goods, which can cause business interruption. Greater awareness of ESG and having programs that promote it can inform organizations' decisions on many facets of their operations, including efficiency, business continuity and risk mitigation. Improved efficiency, sustainability and financial performance offer multiple benefits. Those factors not only resonate with employees, customers and investors, but they also tend to reduce the risk of shareholder litigation, which is a major driver of directors and officers liability claims. In early 2022, one of The Hartford's largest business partners launched an initiative that enables organizations to measure their ESG performance and obtain more capacity and favorable terms for D&O coverage. Clients that go through the ESG consultation process show a commitment to these initiatives and accountability to meet or exceed requirements by regulators and differentiate themselves from peers, and The Hartford is among several participating insurance companies that are eager to support organizations we see as better risks. In addition, we strongly believe in supporting organizations that share The Hartford's commitment to ESG. Understanding exposures. Every organization has a different set of exposures relating to environment, social and governance issues. Organizations should understand what their own exposures are. Looking holistically at ESG. Organizations need to look at ESG programs with a wide-angle lens. They can't just focus on environmental or social; organizations must demonstrate that they have integrated E, S and G into their broad business strategy. Being intentional. Cookie-cutter approaches will not work to strengthen ESG programs. Organizations need to be thoughtful and intentional about how they design ESG plans and the key areas of progress. Support from the top. A top-down approach is needed to drive ESG. That means the board, senior executive leadership and business unit leaders must create the appropriate governance structure to manage, set and execute ESG ambition. Measuring and reporting. Evaluating ESG initiatives year after year and being transparent with progress is also important. Establishing key metrics — for example, carbon emission mitigation, gender and racial diversity, and the level of frequency of disclosures, to name only a few — lets organizations create a baseline for measuring future performance and sharing results. Ziad Kubursi is the Head of Financial & Executive Liability, Public Financial Institutions and Transactional Risk at The Hartford.
ESG activities are drawing increasing scrutiny from regulators and investors, and pending regulations from the Securities and Exchange Commission and other authorities will require public companies to make more disclosures, with specific details on ESG. Even privately held companies, which do not have the same financial disclosure requirements of their public counterparts, are facing consumer and investor expectations to communicate more about their approaches to ESG.The case for ESG
There are solid business reasons for organizations to establish and enhance ESG programs. Companies with strong ESG programs perform better over time, research shows. A 2021 analysis by the NYU Stern School of Business and Rockefeller Asset Management found a positive relationship between ESG and financial performance in 58% of corporate-focused studies that examined return on equity, return on assets or stock price. The analysis also concluded that sustainability initiatives drive better financial performance due to mediating factors that include higher operational efficiency and better risk management.
How to strengthen ESG
Building and maintaining a strong ESG program requires organizations to take several actions. These include:
For more information about The Hartford's ESG performance, please visit: Corporate Sustainability | The Hartford.
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