Frequently Asked Questions on ESG

Environmental: evaluates a company’s management of pollutants, chemical use, carbon emissions, and sustainability efforts including its supply chain.
Social: covers aspects such as diversity and inclusion, compensation practices, and community impact.
Governance: involves the diversity of the board, risk management, transparency in corporate reporting, and the monitoring of compliance and governance strategies.

ESG is important because it addresses the pressing need to safeguard the environment for future generations, and encourages businesses to promote good governance and social responsibility. With increasing regulatory focus in the EU and UK, companies, including banks and insurers, should integrate ESG principles more and more into their operations and decision-making processes. This alignment not only meets regulatory requirements, but also enhances business resilience and reputation.
According to a recent study by ESG News, 60% of institutional investors reported higher returns from ESG-focused investments, reinforcing that integrating ESG principles not only meets regulatory demands but also brings financial benefits. Furthermore, 78% of investors are willing to pay higher fees for funds that adhere to strong ESG criteria, reflecting the growing market appeal of sustainable practices.

ESG risks encompass various environmental, social, and governance challenges:

• Environmental risks: include climate change impacts, biodiversity loss, pollution and resource depletion. Key metrics involve carbon footprint and waste management.
• Social risks: relate to labour practices, data privacy, and community relations, monitored through indicators such as employee turnover, inclusion and diversity metrics.
• Governance risks: focus on ethics, corruption and bribery, shareholders rights, board diversity, and transparency, tracked through key indicators like audit effectiveness and ethical compliance.

In summary, ESG risks are non-financial factors that can have a direct impact on a company's financial performance, sustainability and reputation. Effectively managing these risks is important for long-term success.

Scope 1, 2, and 3 emissions are categories defined by the GHG Protocol to help businesses manage their carbon footprint:

• Scope 1: direct emissions from owned or controlled sources, such as company vehicles and production facilities.
• Scope 2: indirect emissions from the consumption of purchased electricity, steam, and heat.
• Scope 3: other indirect emissions not covered in Scope 2, including those from the supply chain, business travel, and product end-of-life. Scope 3 emissions are often the most significant part of a company’s total emissions, especially in industries like retail, technology, or manufacturing.

Reducing all three scopes of emissions is essential for companies that want to achieve sustainability goals and net-zero emissions.

Insurers are uniquely placed to support efforts to reduce climate risk beyond their own operations. As a sector that contributes £32bn to the UK economy each year and has multiple interactions and touchpoints with households and businesses across the UK, the insurance sector can incentivise and support change, facilitating sustainable decision-making through education and innovative client offerings.

Insurers can leverage ESG data to reduce climate risk in several ways:

• Enhancing risk assessment and pricing: by integrating ESG data and insights into their risk models, insurers can enhance risk assessment, and more accurately price policy premiums based on a higher number of risk factors.
• Developing new ESG-related services: leveraging ESG data enables insurers to differentiate their services, adding value for business customers and meeting the growing demand for greener solutions.
• Improving the claims supply chain: insurers can reduce the carbon footprint of their claims function by incentivising customers who would use locally sourced services and offer a local builder or garage to reinstate their property or vehicle. The claims environment represents an opportunity for insurers to promote their ESG practices and in recognition, a renewed ESG focus is being applied to the claims supply chain.
• Supply chain monitoring: the extensive scope of supply chain monitoring highlights the importance of ESG data and assessment, offering essential continuity and visibility across the value chain, prioritising more sustainable suppliers and partners. By improving ESG performance throughout their supply chain, companies can also enhance processes, reduce costs, increase productivity, innovate, differentiate and improve outcomes for the communities within which they operate.
• Strategic ESG integration: enriched data insights are vital for advancing risk solutions. The industry is well-positioned to fully harness ESG data as it becomes increasingly accessible, ensuring that insurers stay ahead in strategic risk management.

ESG News reported that decarbonisation is now considered essential for businesses to remain competitive, particularly in high-emission sectors such as energy, manufacturing, and transportation. By integrating ESG data into their risk management models, financial providers can better address decarbonisation targets and mitigate the long-term risks associated with climate change.

Businesses face significant ESG challenges, particularly if their supply chain is complex.
Sometimes they aren't fully aware of the true risk level of their assets, or it is difficult to measure their impact on the environment. Issues include environmental pollution, extreme weather conditions caused by climate change, resource shortages, workforce health and safety, and human rights abuses. Companies should ensure their ESG principles are upheld throughout their supply chain to both mitigate operational and reputational risks.

In banking, ESG criteria guide investment evaluations, risk management assessments, lending decisions, reporting to stakeholders and regulatory bodies, and the development of new green financial products. Banks use ESG data and metrics to identify risks and opportunities related to ESG factors, for example by measuring their greenhouse gas (GHG) emissions and assessing transition, physical and environmental risks in compliance with new regulations.

For insurers, ESG considerations are becoming more and more relevant for streamlining their risk management strategies. By embedding ESG data into their risk models, insurers can have a more comprehensive profile of their business clients and propose tailored policy premiums.
Insurers should gradually adapt their models to account for new and extreme climate-related risks and evolving regulations, ensuring they meet industry standards and drive positive change. 

A recent survey carried out by CRIF in collaboration with Insurance Post, revealed that the top environmental risks that insurers consider in the underwriting process include waste and energy management, with business ethics and competitive behaviours being top of mind in terms of governance.
When asked if ESG data and analytics can deliver pricing competitiveness by exploiting a correlation between ESG key indicators and loss ratio, 57.2% of the insurers interviewed agreed about it.

This shows a general belief that potential benefits can be explored and gained.

CRIF offers a comprehensive suite of ESG solutions, providing data and advanced analytics to support financial providers in measuring, managing, and reporting their impact and sustainability efforts. CRIF ESG Solutions help organisations during their sustainability journey, protect their reputation, meet regulatory requirements effectively and stay ahead in the green finance revolution.

In the financial sector, "environmentally friendly" or "green" products refer to financial services, investments, and policy premium designed to promote sustainability and reduce environmental harm. These products often support initiatives that contribute to environmental conservation, renewable energy, or reduced carbon emissions.
Here are a few examples:

1. Green Bonds: bonds issued to raise funds for projects that benefit the environment, such as renewable energy, clean water, or energy efficiency projects.
2. Sustainable Investment Funds: funds or other investment products that focus on companies with strong environmental, social, and governance practices.
3. Green Loans: loans that are specifically designated for projects with environmental benefits, such as building energy-efficient infrastructure, sustainable agriculture, or pollution reduction.
4. ESG-focused Banking Services: banks offering deposit accounts, mortgages, or credit cards with incentives for environmentally friendly behaviours, like financing for eco-friendly homes or rewards for carbon offsetting activities.
5. Sustainable Business Insurance: insurance products that promote environmental sustainability, such as policies for renewable energy projects, cover for commercial electric vehicle charging points and dedicated underwriting resources in the construction industry for the development of sustainable buildings.
6. Green Home Insurance: policies that provide discounts or incentives for owners who install solar panels or use sustainable materials in construction or renovations.
7. Eco-friendly Auto Insurance: policies offering lower premiums or rewards for drivers who use electric or hybrid vehicles, or programmes that encourage reducing driving and lowering emissions.

Younger generations in general show a preference for financial providers who offer environmentally friendly products and promote ESG principles, as they feel the urgency of environmental risks more than older generations. Despite this sentiment, only 17.6% of the insurers interviewed in the Insurance Post/CRIF ESG survey 2024 stated that ESG data is wholly embedded in the product and service development and 56.9% claim it is partially embedded.

The early adopters of this strategy are likely to reap substantial rewards.

Sustainability has become essential for many companies today, and integrating ESG values and practices into a business’s core strategy is vital. Developing an effective ESG strategy goes beyond social responsibility; it's about generating value and minimising risks in an evolving global landscape.

Some essential steps to develop a successful ESG strategy:

• Establish clear objectives: define your goals, whether for regulatory compliance, stakeholder relations, or sustainability benchmarks.
• Develop a framework: set Key Performance Indicators (KPIs), methodologies for data collection, and reporting processes.
• Leverage technology: use software and tools for data aggregation and analysis.
• Engage stakeholders: gather feedback from employees, customers, and other stakeholders to align your strategy with their expectations.

ESG creates value for stakeholders by improving financial performance, managing risks, enhancing reputations, and contributing to social and environmental goals.

Pursuing sustainability can generate several benefits for the stakeholders:

• Investors can improve risk mitigation and long-term performance
• Companies can enhance reputation, achieve operational efficiency and access credit more easily
• Employees prefer to work for ESG-focused companies, which create a better work environment, and prioritise fair wages, diversity, inclusion, and well-being
• Customers can buy green products and services that reflect their values, such as sustainability and social responsibility
• Suppliers and partners can build stronger relationships and foster innovation benefitting both parties through shared advancements and improved processes
• Communities and society because ESG-driven companies are more committed to producing a positive social impact on the environment, investing locally, and promoting social responsibility

ESG reporting involves the disclosure of a company's performance in Environmental, Social, and Governance areas. This includes metrics on carbon emissions, diversity, governance practices, and more. Effective ESG reporting allows stakeholders to evaluate a company’s adherence to ESG principles and regulatory standards.

Key elements of ESG reporting include:

• Transparent ESG roadmap: clearly communicating ESG initiatives and their impacts.
• Risk management: identifying and managing ESG-related risks to avoid vulnerabilities.
• Regulatory compliance: adhering to regulations like the EU’s CSRD, which requires reporting on ESG actions.
• Innovation and efficiency: using ESG goals to drive innovation, reduce waste, and enhance operational efficiency.

ESG principles help corporate, banks and insurers enhance risk assessment by leveraging a wider set of data and insights related to environmental, governance and social aspects.
By incorporating ESG factors, for example financial providers can develop pricing sophistication models, assess their client portfolio, and offer new green products. In addition, these institutions face various risks, including financial, reputational, regulatory, and operational, which can be directly impacted by ESG-related issues.

By incorporating ESG into their risk management frameworks, financial providers can better anticipate regulatory changes, protect their reputations, and reduce exposure to climate-related events, such as extreme weather situations (floods, hurricanes, wildfires) that can damage assets, disrupt supply chains, and increase claims in the insurance industry.

CRIF ESG Analytics provides banks and insurers with in-depth insights into ESG factors across their business relationships. By integrating sustainability assessments and measuring greenhouse gas emissions, organisations can effectively manage and report on ESG issues, ensuring adherence to evolving regulations.

Based on the Insurance Post/CRIF ESG survey 2024 69.3% of insurers interviewed said that ESG data could help them in the future to optimise pricing and better assess their client’s risk. Financial providers can take advantage of innovative ESG solutions including:

• Assisting in identifying the most sustainable and ethically responsible businesses they engage with, allowing them to prioritise these relationships
• Offering green financial products or cover, pricing them accurately
• Enabling the identification of potential future partners aligned with their sustainability goals
• Supporting the company’s own ESG objectives, helping them advance their sustainability efforts by monitoring natural resource consumption and their impact on biodiversity
• Safeguarding their reputation by reducing risks associated with the organisations they collaborate with and implementing measures to address any ESG-related exposures of customers and suppliers
• Ensuring they meet reporting and compliance obligations for stakeholders, investors, and regulatory authorities

The growing impact of climate risks in recent years has made it more crucial than ever for insurers to integrate ESG data into their underwriting processes and pricing models. Floods and storms are the most significant climate-related risks assessed by insurers, followed by other factors such as heatwaves, cold snaps, and landslides (Insurance Post/CRIF ESG survey 2024).

Extreme weather conditions are more and more frequent and the impact on insurance premiums on one side and claims management on the other side are undeniable. Integrating ESG data and key indicators into underwriting models can enhance risk awareness and policy pricing accuracy. Underwriters can assess risks related to climate change, such as increased frequency of extreme weather events and legal liabilities. By incorporating ESG metrics, insurers can better manage exposure and forecast potential litigations.

The finance sector can drive value by adopting sustainable finance practices, such as by integrating environmental, social, and governance (ESG) factors into investment and financial decision-making. This involves supporting credit policies and commercial strategies that align with ESG principles. Sustainable finance can enhance long-term profitability and resilience, promoting climate risk mitigation, developing green products such as green bonds or sustainability-linked loans, and supporting local communities by financing projects in affordable housing, healthcare, and education.

Financial institutions can also drive innovation and meet the growing consumers’ demand for sustainable products. Today younger generations are increasingly mindful of their impact and taking steps to reduce it. In tandem, there is a rising expectation for businesses, particularly financial institutions, to address environmental issues while maintaining strong ethical standards in their operations.

The latest CRIF’s Banking on Banks Report 2024 reveals that nearly six in ten (59%) consumers are more likely to choose a financial provider that acts as a positive force in society. This sentiment is particularly pronounced in Italy (70%), followed by France (65%) and the US (63%). Additionally, over a quarter (28%) of consumers expect their financial institutions to behave responsibly and ethically, with this expectation rising to 43% among US respondents.

ESG factors play a significant role in the insurance industry, influencing ratings and enhancing risk management. Insurers are increasingly recognising that integrating ESG information not only improves investment performance but also supports more effective risk management.

There are also industry initiatives that are driving the adoption of sustainable practices within the insurance sector. ClimateWise promotes climate risk management and encourages the insurance sector to take action on climate-related risks and the Principles for Sustainable Insurance (PSI), which provide a global framework for the insurance industry to address environmental, social, and governance risks.

Pillar One of the ABI's Roadmap focuses on the steps the Association of British Insurers’ members must take to align their portfolios with Net Zero goals, specifically addressing the ‘financed emissions’ linked to their investment and underwriting activities. This pillar also details how the sector will fulfill its commitment to achieving Net Zero by 2050, in line with the Long-Term Global Goal (LTGG) established in Article 2.1 of the Paris Agreement and reaffirmed at COP26.

In the UK, key reporting regimes include the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022, and Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations.
In the EU, the Corporate Sustainability Reporting Directive (CSRD), European Sustainability Reporting Standards (ESRS), and the Sustainable Finance Disclosure Regulation (SFDR) are significant.

Here is a list of some voluntary international ESG reporting and disclosure standards:

• CDP (formerly Carbon Disclosure Project)
• Global Reporting Initiative (GRI)
• Task Force on Climate-Related Financial Disclosures (TCFD)
• International Sustainability Standards Board (ISSB)
• Taskforce on Nature-related Financial Disclosures (TNFD)

To enhance ESG performance, companies can:

• Assess current performance: benchmark against peers, conduct a materiality assessment and identify gaps
• Define ESG goals: set clear, measurable objectives aligned with global standards
• Develop an action plan: outline specific steps and responsibilities for achieving ESG targets
• Monitor and report: use recognised frameworks for consistent reporting and communicate transparently
• Promote continuous improvement: regularly review and update ESG goals, fostering a culture of learning and adaptation

CRIF’s repository of ESG data and over 30 years of expertise in advanced analytics can help organisations gain valuable insights into any company’s ESG performance, as well as that of UK and European businesses you collaborate with, fostering good governance and social responsibility.

CRIF ESG Solutions can support corporates, banks and insurance companies during their sustainability journey by:

• Identifying and prioritising sustainable, ethically minded business partners, supporting the issuance of green finance and green insurance
• Finding future collaborators who align with your sustainability goals
• Advancing your own ESG objectives, such as monitoring natural resource use and its impact on biodiversity
• Protecting your reputation by mitigating risks in business associations and addressing any ESG-related exposure from customers or suppliers
• Enhancing policy pricing competitiveness by leveraging the strong correlation between ESG metrics and loss ratios, improving profitability, and competition
• Evaluating your sustainability and the sustainability of your entire supply chain, measuring the climate impact and environmental risks on your assets
• Meeting reporting and compliance obligations for stakeholders, investors, and regulators