8 minute read
The Mutli-faceted Role of Insurers and the CSO in the Net-zero Transition Journey
Professor of Practice (ESG, FinTech, Governance), Convenor of the Hong Kong Polytechnic University’s Sustainable Finance Centre of Excellence; Managing Director of Triniton Advisors, a specialist ESG advisory firm; and a Vice Chair of the British Chamber Financial Markets Committee.
The ramifications of climate change
Climate change is real, and the clear and present danger it poses indiscriminately dawned on the 7 5 million residents of Hong Kong in early September 2023, when heavy rainfall unseen since 1884 erupted, resulting in severe disruption and images of flooded streets in the Central business district surreal to Asia’s premier International Financial Centre to a submerged ground floor of a usually hustling and bustling Wong Tai Sin shopping mall
It may be worthwhile to briefly touch upon the three types of climate change risk according to the Task Force on Climate-related Financial Disclosures (TCFD ) supplemental guidance to the insurance sector around 1) governance, 2) strategy, 3) risk management, 4) metrics and targets.
The first type of climate risk as described in the above situation is called physical climate risk, and to be more precise acute physical climate risk or extreme weather events such as droughts, floods, typhoons, and wildfires. There is also chronic physical climate risk, which is due to changing climate conditions such as rising temperatures and sea level rises. Physical climate risk can cause direct damage to physical assets or property, resulting in lower asset values, increased insurance claims, and supply chain disruption
The second type of climate risk, less well-known, is transition climate risk, which is the financial risk on a company’s assets due to the transition from a carbonreliant to a low-carbon or net-zero carbon economy. Policy and regulatory changes (including carbon pricing), but also society’s behavior in terms of consumption and purchasing (including energy), and the pace and scalability of (green) technological innovations, are the key drivers impacting future climate transition pathways and scenarios.
The third type of climate risk is called liability climate risk, which is the risk of regulatory enforcement and stakeholder litigation against actions of companies or failure to act. Liability climate risk can cause business disruption from litigation and decreased profitability from financial penalties.
Significant investment in sustainability initiatives and technology is required to fight climate change, where listed (and private) companies play an important role
Not surprisingly, the Stock Exchange of Hong Kong (HKEX) set a 1 January, 2025 implementation date for listed companies for enhancements of its climaterelated disclosures under its ESG framework, which are informed by the International Financial Reporting Standards (IFRS) S2 climate-related disclosures published by the International Sustainability Standards Board’s (ISSB)
The crucial year 2024 allows issuers or listed companies to familiarize themselves with the new climate-related disclosure requirements related to governance enhancements, material risk and opportunity assessment, and a transition plan with proposed changes to business model, strategy, and resource allocation (including Chief Sustainability Officer) to address risks and opportunities
The responsibility of the insurance sector
Climate change or more specifically the fight against climate change risk requires a broad coalition of ecosystem partners, where insurers who hold a significant proportion of global assets and liabilities on their balance sheets in facilitating the net-zero transition are playing roles such as:
Responsible and sustainable investor deciding what projects and which companies in what sectors receive funding with the insurance industry writing more than USD 7 trillion in premium globally and holding over USD 36 trillion in Assets under Management (AuM).
Responsible risk taker deciding what projects get insurance cover against what cost to make projects economically viable, which requires insurers to conduct due diligence and develop a thorough understanding what projects impact climate risk.
Responsible risk manager designing risk adaptation and developing risk mitigation strategies for companies and governments, leveraging the insurance sector’s in-depth understanding of risk management, scenario analysis, and talent pool of actuaries
Responsible pioneer of GreenTech driving accelerated adoption of GreenTech (including green fintech and green Insurtech), where insurers as risk experts with vast amounts of data at its disposal are uniquely positioned to play a central role in partnership with academics, listed and private companies, policymakers and regulators, and technology start-ups
Insurers also have a role as a responsible business and employer employing more than 90,000 employees in Hong Kong, which is more than one out of fifty employees in Hong Kong.
The role of the Chief Sustainability Officer
Climate change has received much attention due to policymakers and regulators’ intentional focus on the E or environmental of ESG, as arguably the more pressing issue and easier to grasp, but there is also the S for social and G for governance.
The latest addition to the C suite stable is the Chief Sustainability Officer (CSO) The actual title may differ by insurer with variations in Asia such as Group Head of Sustainability, Group Director of ESG, Head of Group ESG. In Europe, the title (Group) Head of Sustainability is more widespread.
While both ESG and Sustainability are concerned with environmental, social, and governance factors, ESG is a term used by stakeholders such as institutional (and retail) investors, rating agencies, and regulators to evaluate the financial and non-financial performance of companies based on environmental, social, and governance factors.
Sustainability is a broader philosophy or principle that encompasses responsible business practices with a more holistic view on the long-term consequences of profit, people, planet (dubbed as the triple bottom line).
The daunting task of coming up with the job description (JD) to recruit a Chief Sustainability Officer for a company is not surprisingly difficult, where a onesize-fits-all approach is not fit for purpose
The Chief Sustainability Officer roles and responsibilities, at least for now, should be driven by the industry-specific material risks and opportunities related to sustainability and the individual company’s ambition (long-term strategy), accountability, (governance structure) and action plan (short-term strategy) and maturity of its current state people, process, data and technology capabilities with regards to sustainability
There have been admirable attempts by consultancy firms to come up with different conceptual models to frame the different faces or facets of a Chief Sustainability Officer’s role. Let me take the opportunity to add my own model “Four Ps or Purposes of the Chief Sustainability Officer” based on their role’s key mandate, performance indicators, and purpose
(Strategic) Planner - acts as evaluator of a company's strengths and weaknesses, industry risks and opportunities (SWOT) with a focus on achieving a strategic edge in sustainability.
Promoter - acts as (brand) evangelist of external sustainability trends and developments relevant to the company and the company’s internal sustainability progress with a focus on attracting capital, revenue, and talent
Project manager – acts as executor of the company’s sustainability transformation or transition plan with a focus on adapting the company’s business model, policies and processes, products and services.
Protector - acts as enforcer with a focus on achieving compliance with external regulatory and internal governance, risk management, and control (GRC) requirements
In theory, the ideal Chief Sustainability Officer should be able to play all these roles. Not necessarily everything, everywhere, all at once, but at different stages of the sustainability transformation journey.
In practice, the Chief Sustainability Officer, who may not be familiar with the insurance industry to add a fresh outside perspective, brings his or her own strengths and weaknesses to the role and is often more comfortable with one or two of the roles. This may justify having different individuals from different functions fulfill different sustainability related roles, together becoming the ESG or Sustainability SWAT team.
Through my dialogue with Hong Kong CEOs and Group Chief Sustainability Officers of a number of leading insurers in Asia and Europe, I concluded that Group Chief Sustainability Officers in Asia often report directly or indirectly to the Group CFO, and in another case to the Group General Counsel.
In Europe, the Chief Sustainability Officers researched, report into the Board, Executive Committee or Management Committee member sponsoring sustainability such as Chair of the Sustainability Board, Group Chief Communications and Sustainability Officer on the Management Committee, and Sustainability ExCo sponsor.
While the reporting line of the Chief Sustainability Officer may vary, the seniority and perception towards sustainability of the individual to whom the Chief Sustainability Officer reports into, determines the degree empowerment of and potential impact of the Chief Sustainability Officer.
The road ahead
In insurance and other industry sectors, the stakeholder expectations continue to evolve and increase, not only on the role of the Chief Sustainability Officer, but also on the responsibilities of the Board, Executive, and Management Committees, CEOs, CFOs, Chief Risk Officers, Chief Compliance Officers, Chief Actuary, Chief Insurance Officer, etc. To match the increasing expectations from stakeholders such as regulators, retail and institutional investors, insurance policyholders, and talent, there needs to be commensurate increase in expertise and experience in sustainability, where not all insurers have the required experts in-house
