ESG Risks and Impacts on Insurance Contracting

Jaqueline Monteiro brings two decades of expertise in insurance and risk management to her role as a global insurance and risk manager at SAE Towers. With a background in Civil Engineering, she has specialized in various facets of insurance, including engineering risks, industrial risks and property insurance. Her experience spans national and international insurance programs, encompassing areas such as EAR/CAR, civil liability, transport and environmental risk.

Jaqueline's adeptness in navigating diverse insurance domains ensures comprehensive coverage and robust risk mitigation strategies for SAE Towers in the infrastructure, power, energy and real estate sectors. Jaqueline Monteiro, shares her insights into successful execution, future trends, and leadership strategies, offering invaluable guidance to organizations seeking to optimize their operation through environmental, social and governance (ESG) factors.

Facing the current scenario of climate change and environmental catastrophes, companies around the world are integrating environmental, social and governance factors as a fundamental part of their business strategies. Recognizing the importance of considering these factors goes beyond mere corporate social responsibility; now, it is a risk and opportunity management strategy, essential to guarantee the sustainability and long-term success of companies. Globally, economic losses caused by climate change have increased by 250% in the last 30 years. It is therefore clear that it is urgent to understand and implement ESG factors.

But what are ESG risks?

ESG risks are the challenges an organization faces with environmental, social and governance issues that can impact its operations, reputation and financial performance. There are several sources of risks, such as regulatory changes, scarcity of natural resources, labor problems, and cybersecurity. Among others, ignoring these risks can lead to significant negative consequences, including fines, lawsuits, damage to the company's image, loss of investors, including impacts on insurance. Therefore, it is necessary to manage these risks with actions to identify, evaluate and mitigate the risks and opportunities associated with ESG factors, understand how these factors can affect operations and business strategy, anticipate threats and leverage opportunities.

But how does this impact the company's insurance?

According to Swiss Re's 2022 Sigma report, global losses resulting from natural disasters were approximately US$275 billion of which 45% were compensated by insurance, the year 2023 was again characterized by extreme insured losses. The number of losses in natural disasters was US$ 250 billion with 38% of this amount being covered by insurance. This is equivalent to an average annual increase of 5% to 7% in insured losses over the last 3 decades. It is interesting to note that, unlike in 2022, in which Hurricane Ian impacted around US$ 100 billion of global losses, in 2023 statistics indicate losses characterized by severe regional storms.

Ensuring the implementation of ESG criteria in a company's risk management, controls risks, bringing financial security and tranquility to the business

In North America, around US$ 66 billion was lost due to climate factors, of which US$50 billion was insured. In Europe, the value was US$10 billion, of which US$8 billion was covered by insurance. With around 74 thousand deaths, 2023 was the deadliest year in natural disasters since 2010, well above the annual average of the last five years which was 10 thousand. 76% of economic losses caused by natural disasters are related to climate, while 24 % had geophysical causes, such as earthquakes.

For example, one of the main causes of the worsening of climate disasters is the increase in temperature. Around the world, average temperatures until November were around 1.3°C higher than in pre-industrial times (1850-1900), making the year 2023, the hottest since temperatures have been measured. Global warming intensifies extreme weather conditions, causing a significant increase in losses, forcing society and industry to better understand the evolution of risks and what actions must be taken to control them, making risk analysis a key factor in the insurance market.

Concern with sustainability and environmental practices is nothing new but with the signing of the Paris Agreement in 2015. It definitively entered the financial market agenda globally, mainly emphasizing climate risks and their potential impacts on the stability of the financial system. Globally, the insurance market has adopted standards requiring insurers and reinsurers to implement ESG factors in sustainability policies and the risk management structure and operational processes of their pricing and underwriting areas, establishing limits for risk concentration or restrictions for conducting business.

Insurers are being pressured to act decisively in preventing their risks, being meticulous in the details of the risks, as a consequence, they are increasingly demanding from their clients to align ESG practices, focusing mainly on environmental and climate issues. Analyzing how companies have adopted ESG criteria to avoid any problems that their activity may cause to the environment and third parties, some insurance companies are even restricting their portfolio by measuring companies' carbon footprint. Companies that follow the requirements, in addition to impacting the world with actions to improve the environment and climate, may also have a reduction in the rates applied to their policies, bringing significant financial savings to the business.

The analysis is simple and clear: the higher the lack of climate control, the higher the chances of catastrophic events and the higher is going to be the loss with compensation from insurance companies. Thus, ensuring the implementation of ESG criteria in a company's risk management, controls risks, bringing financial security and tranquility to the business. It minimizes impacts on the environment and global climate change, guaranteeing improvements to the world climate and financial savings, reduction of fees, ease of acceptance of risks and breadth coverage when contracting insurance policies.