By Benjamin Otieno (Kibabii University) and the Conversations with Practitioners Working Group.
Andrew Chow is the Senior Vice President, Chief Compliance Officer & Head of Strategic Project Management at Asia Insurance, Hong Kong. He also doubles as the Chief Risk Officer at Avo Insurance, a virtual insurer. He is an active practitioner in the industry, promoting Environment, Social, and Governance practice.
Corporate Social Responsibility or Environment, Social, and Governance
Corporate social responsibility (CSR) refers to the idea that companies should take responsibility for the immediate society within which they operate. On the other hand, Environment, Social, and Governance (ESG) refers to initiatives geared towards providing quantitative measures towards sustainability. Sustainability focuses on how a company can guarantee long-term viability given the investments made on the internal structures and on their clients. ESG is a set of data-driven initiatives meant to reduce greenhouse gas (GHG) emissions and their effects, increase social inclusion in corporate activities and maintain high governance standards. The improvement of these three areas (environment, social, and governance) has the potential of improving livelihoods.
27th Conference of the Parties
Andrew Chow describes ESG as an economic and moral imperative which stands to benefit private citizens due to its impacts on environmental issues as well as social issues such as human rights, child labor, and corruption. Such social protection is key for the marginalized groups/individuals in society. He states that Hong Kong has made good preparation for the governance structures to support ESG.
There have been many missed targets in the various items discussed at the Conference of the Parties (COP) of the United Nations Framework Convention on Climate Change (UNFCCC). The agreements in COP 27 should be taken more seriously to make up for the missed commitments. Historic food security crises in Africa, displacement of millions in Pakistan due to floods, and the heatwaves across Europe are some of the negative consequences of irresponsible actions and as such COP 27 should have presented implementable accountability measures.
Should there be prorated compensation by polluters?
Developing countries are responsible for only 2–4% of greenhouse gas (GHG) emissions, while developed countries are responsible for the bulk of pollution. However, developing countries are often the ones who suffer the most from the negative effects of this pollution. To address this, it is reasonable to suggest that countries responsible for a larger proportion of GHG emissions should contribute more to mitigating its effects by contributing more to the funding pool for mitigation efforts. One possible way to determine the pro-rata contribution could be based on the GDP of each country. This fund could then be directed through channels such as green bonds or inclusive insurance.
Support from insurance companies to ESG
Chow stresses that we should not see ESG as a regulatory compliance issue but rather as an ethical issue.
Over the years, insurance companies have developed a robust governance structure and an understanding of the impact of extreme weather events. The industry’s core strength is how to manage life, health, property, and liability risks. ESG risks are no different. The insurance industry can play a leading role in helping other industries to understand climate risks and ESG risks in general. The insurance industry is also a major investor and as such can take a leadership role in leading green bond uptake and shunning irresponsible industries.
The industry however is still struggling with standardized measures of ESG risks. Net zero as a measure of achievement of the desired ESG state is often manipulated by such acts as double accounting.
However, for the insurance industry, measuring ESG risks using indicators such as sea level rise to predict typhoons or floods has been practiced for a long time. We already have tools and methodologies to assess the risks, and insurance companies are now withdrawing from heavily polluting risks.
Reporting and the role of boards
Hong Kong exchange issued a revised version of the reporting guide which stresses the role of companies’ Board of Directors in the process of ESG reporting, including overseeing and assessing the ESG matters and risks. Mandatory reporting on climate change related information was also added. Under the comply or explain principle, any non-compliance requires listed companies to give an explanation. So far, the guidelines only apply to companies listed in the stock exchange.
How do you balance investment in ESG and profitability?
As companies and stakeholders, including investors, customers, and employees, as well as government bodies, increasingly focus on substantial and socially responsible practices, the need for effective ESG strategies becomes more critical. Strong ESG practices are shown to significantly contribute to increased investment, revenue, and sales for corporations. Implementing a strong ESG strategy can provide a competitive advantage over competitors. However, just as it can be challenging to communicate risks related to conduct, such as insider trading, conflicts of interest, or inappropriate incentive schemes, communicating ESG risk to boards can also be equally difficult. As a result, some may view ESG implementation as a cost to the business initially. Nevertheless, from a risk management perspective, if the risk can be managed effectively, it can become a competitive advantage.
How can the insurance regulators encourage green bonds?
The regulators can easily encourage the insurance industry to invest in green bonds by giving a favorable haircut (risk charge) in the calculation of solvency ratios. They can also set punitive haircuts for dirty bonds such as petrochemical bonds and commercial papers. Hong Kong regulators are keen on encouraging market players in implementing ESG. China speaks a lot about ESG, which could be for environmental or political reasons, but the investments they have made in ESG matters is immense and Hong Kong is following the same route.
