The world’s leading insurers are taking part in a global project that aims to ensure risks such as climate change, human rights abuses and corruption are considered in large infrastructure projects.
A study framed by Executive MBA candidates from the Business School at the University of Technology, Sydney (UTS) is examining how insurers integrate such environmental, social and governance (ESG) risks into their agreements with infrastructure developers.
Their survey will feed into a project involving the United Nations, the World Bank and the world’s largest reinsurer, Munich Re, looking at how the insurance industry can strengthen its contribution to “sustainable” development.
“At present, there are no internationally recognised principles tailored to guide surety bond underwriters in assessing ESG risks associated with infrastructure projects,” says Butch Bacani, program leader of Principles for Sustainable Insurance (PSI), which is part of the UN Environment Program Finance Initiative (UNEP FI).
“One of the key aims of the PSI is how insurers can better manage ESG risks relevant to their core business,” says Bacani. “This project is a concrete example of how we can turn the Principles into practice by understanding and reducing risk and promoting economic, social and environmental sustainability.”
The results from the survey will inform the development of ESG guiding principles for surety bond underwriting.
The PSI is the largest collaboration yet between the UN and the insurance industry. Eighty insurance and stakeholder groups from around the world have adopted the four Principles for Sustainable Insurance, including insurers representing 15 per cent of world insurance premiums and $US9 trillion ($11.5 trillion) in assets under management.
EMBA candidate Melissa Iverarch explains that a surety bond is an undertaking by an independent third party – the “surety”, an insurer – to the owner of the bond that a contractor will perform in accordance with the terms and conditions of a project contract.
Surety providers are in a position to influence how ESG risks are addressed in big projects if, in writing bonds, they ask questions about how a developer or contractor deals with issues such as climate change, pollution, labour rights and worker safety, she says.
Preliminary research by the UTS team and postgraduate students from partner institution the Fox School of Business at Temple University, Philadelphia, suggested big differences in how ESG factors were considered in types of projects and in different countries.
“The question is, to what extent are ESG factors being considered as risks by surety providers – not at all, implicitly or explicitly?” she says of the full survey now being circulated.
Ultimately, the benefits of having an ESG framework for surety bonds will be improved outcomes not only for the parties to surety bond transactions, she says, “but also improved outcomes for communities and economies”.
Associate Professor James Hutchin, director of the UTS EMBA program but formerly at Fox, was the lead academic on research that resulted in the Principles of Sustainable Insurance in 2012. He has a background as an executive in and consultant to the financial services sector, including insurers.
“The insurance industry has a fundamental role in ensuring sustainable development,” Associate Professor Hutchin says. “Its ‘core business’ is managing risk. That means it has long been a kind of ‘early warning system’.”
Insurers were among the first to identify and act on the business risks – let alone the risks to the planet – associated with climate change, he says.
“That larger role, as a catalyst for change, isn’t always understood or appreciated by the public at large,” he says.
It is in insurers’ interests to tackle the myriad interconnected ESG factors, which have the potential to undermine the long-term health of the industry, he says, but it is also vital to economic and social prosperity generally.
EMBA candidate Gareth Chegwidden says the issues the team investigated in the UNEP FI project were complex but important ones. “This isn’t just your standard MBA project but something really cutting edge in terms of how the global insurance industry is going to manage risk,” he says.
“We were given the opportunity to play a part in achieving industry-wide change which delivers tangible outcomes with long-term impacts.”
The Business School at UTS recently became one of the first educational institutions in the world to sign the PSI as a supporting institution. The Insurance Council of Australia is also a supporting institution, alongside two Australian insurer signatories, Insurance Australia Group (IAG) and TAL.