Over the past 12 months, ESG has continued in its rapid rise to prominence, moving from a "boardroom buzzword" to a baseline requirement. This has created a growing expectation from stakeholders that insurers actively integrate an understanding of the risks and opportunities afforded by ESG into their operations and decision-making processes.
The advancement of ESG has already catalysed significant changes within insurers. Diverse board composition is now seen as an expectation rather than an aspirational goal, with the PRA expecting firms to implement policies promoting diversity at a board level. Insurers are also increasingly focused on ensuring investments are consistent with their ESG values. For example, a growing number of insurers have reduced or ceased to invest in fossil fuel projects whilst Aviva's decision not to invest in Deliveroo's IPO was in part driven by their concerns over workers' rights.
Today the scope of ESG for insurers continues to widen, particularly as ESG uniquely impacts both sides of an insurer's balance sheet – the asset side (as investors) and the liability side (as underwriters). For example, ESG creates opportunities for insurers in M&A, with targeted acquisitions enabling direct investment in ESG compliant investment products or in targets that may have particular ESG underwriting expertise. Such acquisitions can help develop an insurer's own ESG responsible investing expertise and underwriting expertise. However, ESG also creates risks for M&A transactions as companies are expected to apply improved sustainability standards and frameworks to all their transactions with a view to ensuring compliance with ESG standards.
Buyers should therefore consider how ESG factors can be embedded into all elements of their acquisitions, even transactions that are unrelated to ESG investments. Assessment of ESG performance and compliance should be a key part of the selection of potential acquisition targets, focussing on both the extent to which a target's positive ESG performance may be leveraged to provide opportunities for the merged or acquired entity and how a target's negative ESG performance may create risks for the firm or make it an undesirable investment.
The EU Parliament's recent decision to impose mandatory ESG due diligence, obligating companies to identify, address and remedy their impact on human rights and the environment throughout their operating structure, highlights the importance of incorporating ESG into due diligence. Material ESG factors identified can inform pricing and effective contractual warranties against ESG risks, as well as determine what pre-completion undertakings may be required.
Effective post-acquisition integration is also important to ensure the long term value of the acquisition. Any misalignment in international sustainability standards adds an additional layer of complexity, particularly in jurisdictions where ESG standards are lower or at odds with a firm's internal ESG strategy. Insurance firms should be alive to any adjustments to risk management and investment policies that may be required to maintain ongoing ESG compliance and capitalise on the wealth of opportunities that ESG will continue to provide.
ESG will continue to be a critical factor for all elements of an insurer's business and firms should ensure they are prepared to sustainably develop as ESG performance becomes a central part of a firm's expected business model.
Kate Wilson, Clifford Chance Associate, Financial Institutions Group
Riya Sen Gupta, Clifford Chance Director of Insurance, Transactions and Regulation, Financial Institutions Group
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Please note this blog post was written by a Clifford Chance LLP employee. Clifford Chance LLP is the parent company of Clifford Chance Applied Solutions (CCAS). The content within this post does not constitute legal advice.