Why ESG Could Save You From Extinction Rebellion

I was really happy to read recently that the Bermuda Stock Exchange (BSX) has launched an environmental, social and governance initiative that aims to enable sustainable and responsible growth for its member companies and the wider community.

Greg Wojciechowski, CEO of the BSX, was interviewed by Intelligent ILS to explain what it means for the exchange and the ILS markets. As Greg explained, ESG criteria are standards for a company’s operations that investors use to screen potential investments.

Environmental criteria consider how a company’s operations impact the natural environment and climate. Social criteria examine how a company manages relationships with employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.

The BSX has embraced the WFE’s five sustainability principles; to educate participants in the exchange ecosystem about the importance of sustainability issues; promote the enhanced availability of investor-relevant, decision-useful ESG information; actively engage with stakeholders to advance the sustainable finance agenda; provide markets and products that support the scaling-up of sustainable finance and reorientation of financial flows; and establish effective internal governance and operational processes and policies to support their sustainability efforts.

So why is this is important news? I have explained in previous blogs, ESG is an increasingly hot topic and one that is very much part of the public zeitgeist with many cities around the world hosting Extinction Rebellion protests.

Some parts of the financial services sector have taken some cues and have products that are specifically tailored to address corporate and public concerns, but many have a long way to go to be considered in the same league as companies in other sectors.

An example that is often considered to be ahead in this respect is the Insurance Linked Securities (ILS) market. It is increasingly regarded by some commentators as doing what is right when it comes to incorporating ESG criteria into their rating business models.

The traditional insurance and reinsurance carriers are lagging behind in this area, this is becoming more important now as this is coming to the attention of the rating agencies such as AM Best which without action, some organisations will start to see their rating score negatively impacted.

So, given how important ESG is, how can insurers improve or retain their rating agency score through a more structured or automated approach that captures their risks and exposures to clients with investments in fracking, tobacco, junk food, high carbon footprint organisations?

Insurers face huge risks and opportunities associated with climate-change trends and challenges to close the protection gap. Many of the biggest insurance brands such as Munich Re, Swiss Re and Allianz are aware that many of their shareholders expect them to align their long-term investment and underwriting strategies accordingly. Such strategies need to be broad, to ensure that they include the wide and varied elements of ESG. These tend to include things like the implementation of exclusion criteria in underwriting lines for eliminating certain “toxic risks” such as weapons, coal-based energy production, and tar sands, as well as the more common concerns around the organisations that are not environmentally friendly.

It is important that all aspects of a business play their part in helping their business define and meet its ESG goals and objectives. IT leaders and influencers are certainly a big part of that. The drive towards big data and the capture of more and more data is driving the demand for more data centres.

With the increase in the amount of data being collected by microsensors and the Internet of Things (IOT) devices increasing the speed of data collection and storage is only going to increase. We are already at a point where 90% of all of the information created since the beginning of human history has been created in the last 2 years, and with 4.1Bn people with access to the Internet that figure is only going to increase.

All of that data to has be stored somewhere which means that a big part of organisation’s ESG strategy is going to be ensuring that they have a good strategy for what they store and how they store it.

Data centres in the U.S. alone (where a large proportion of power generation is still from coal) are already consuming more than 90 billion kilowatt-hours of electricity a year. Globally data centres consume 3% of total energy created annually. This is enough to run and provide all of the power requirements for the whole of the UK for over 1 year 5 months.

That is why the BSX is not only encouraging others to look at ESG but is also embracing it at their Hamilton headquarters and are taking steps to improve energy efficiency, cutting down on waste, recycling and adopting a greener footprint.

Global insurance companies are data rich entities and their carbon footprint will only grow as their digital footprint consumes more resources. In this new ESG conscious world they will therefore come under increasing scrutiny from investors, regulators and their customers who will put pressure on them to embed socially aware practices in their business strategy.

Launching the initiative Greg said that Bermuda leads the world in this sector and of the 950 securities listed on the BSX, ILS comprises 330 listed issuers with $32.7 billion in market capital outstanding. As investors look to grow their holdings in asset classes linked to social and responsible investments, this increased demand has created an expanded pool of investors in these securities, which are helping to narrow the protection gap which are uninsured and underinsured risks.

As the world leader in ILS, Bermuda will play an increasingly important role in assisting communities around the world adapt to and recover from natural disasters, a changing climate and the resulting impact on vulnerable communities. And many of the BSX’s listings, especially in the Insurance Linked Security (ILS) Sector, are well advanced in developing products that move the sustainable finance agenda forward.

It is also good to see that the World Federation of Exchanges (WFE) is on board and firmly supports the BSX on its sustainability path. Nandini Sukumar, the WFE’s Chief Executive Officer, believes that exchanges - as a central point of contact for issuers, investors and market intermediaries – act as important vectors in the transition to sustainability.

Organisations that do not yet have an ESG strategy need to start the process and be able to demonstrate their credentials and values in this area. At this time, this is still a business opportunity, but in the not too distant future, this will become a business normality and expectation. For those firms who are unable to make the transition it may be a quick transition from investable and rateable to un-investable and un-rateable.

My conversations with organisations have informed me that many businesses are increasingly at risk of being left behind on this challenge to their own sustainability, and need the support that Fifth Step provides on ESG implementation.

I have recorded a podcast on what CIO’s should do about ESG, which will be appearing at https://www.fifthstep.com/Podcasts shortly.

Or, if you would like to take a deeper dive into Fifth Step’s ESG service please contact me Darren.wray@fifthstep.com