There is an undeniable alignment between the financial protection role played by financial institutions and the overarching goal of inclusive and sustainable growth across Africa. As such, banks and insurers that ply their trade on the continent must take extra care to identify and monitor sustainability metrics that are aligned with their various business units.
“Standard Bank Insurance’s sustainability strategy aligns with the group’s purpose, to drive inclusive and sustainable economic growth in Africa; we achieve this purpose by providing products and services that meet the development needs of Africa and her people, says Nolwandle Mgoqi, head of insurance for Standard Bank South Africa. “We identify our material sustainability issues based on the social, economic and environmental impacts of our activities on our diverse stakeholders, alongside the environmental, social and governance (ESG) risks that potentially impact on our ability to create value for our shareholders and society.”
This writer’s informal conversation with Dr Mgoqi explored the non-life insurer’s approach to resilience and sustainability, words that often appear in concert in the same paragraph or sentence. How does Standard Bank interpret these words in relation to the group’s insurance operations? In a recent thought leadership piece, the interviewee referred to ‘sustainability’ as the ability to sustain the long-term economic health and resilience of the broad insurance industry, with ‘resilience’ being an ability to weather storms that arise in a challenging operating environment. Sustainability thus deals with how an insurer develops solutions to ensure economic resilience.
“In the context of sustainable business, as informed by ESG, the terms resilience and sustainability are, to an extent, interchangeable,” says Dr Mgoqi. “Currently, the conversation around sustainability issues, as well as their environmental impact, are at an all-time high [and] insurers are expected to provide sustainable approaches that also offer economic resilience in an ever-changing environment.” Events over the last 24 months have heightened the need for insurers to be more adept in responding to change. Readers will appreciate the impact on global and local insurers of the 2020-21 pandemic; the July 2021 social unrest in parts of Gauteng and Kwa-Zulu Natal (KZN); and the severe flooding along the KZN coastline in April 2022.
Standard Bank, well-established among the top four retail banks in South Africa, bases its sustainability strategy on two pillars. Pillar 1 involves achieving positive societal, economic and environmental (SEE) impact linked to the United Nations Sustainable Development Goals (UN SDGs), focusing on seven impact areas linked to core business activities. And pillar 2 entails upholding good ESG practices and doing business in a way that minimises harm to others and meets the group’s responsibilities as a responsible corporate citizen. “We recognise that we operate in markets and sectors that are rated as high ESG risk, making effective ESG risk management crucial to minimise direct and indirect harm to the environment and society arising from our operations,” says Dr Mgoqi.
Identifying and managing risks are among the primary roles that non-life insurers undertake, with the core principle of risk management being closely aligned with ESG criteria. There is also an inextricable link between having a sustainable business and effectively managing the impact of environmental and societal issues. “Our understanding of environmental risk as it relates to society helps to inform the solutions that we develop for our customers and the communities we serve,” says Dr Mgoqi. “Our approach to ESG risk management is informed by a holistic view encompassing global frameworks and standards; regulatory requirements in countries of operation; the group’s code of ethics and conduct; and the expectations and priorities of our diverse stakeholders.”
Delivering sustainable insurance is a complex task that revolves around reducing risk, offering innovative solutions and improving business performance whilst contributing to positive environment, social and economic outcomes. This realisation is evident in the approach taken by the UN and other global bodies in addressing resilience and sustainability. For example, the UN’s Principles for Sustainable Insurance Initiative (PSI) illustrates the need for insurers to actively demonstrate how their actions are effectively benefiting current and prospective stakeholders.
Insurers cannot shirk their responsibility to work towards big picture climate-related goals such as halving emissions by 2030 and limiting global warming to no more than 1.5 degrees celsius by 2100. “We understand that climate change impacts the insurance industry significantly, and while there is a greater appreciation and heightened sense of the impact of environmental changes globally, it is my view that we cannot address sustainability without focusing on all three ESG components: environmental, social and governance,” Dr Mgoqi says. Furthermore, insurers must address these challenges holistically.
The rising frequency and severity of climate change related natural catastrophe losses pose systemic risk to non-life insurers, and such events are already affecting underwriting, pricing and investment activity across the sector. Unfortunately, Africa-based insurers cannot afford to ignore the relationship between environmental and social risks. “We need to ensure that we are constantly thinking about the strong link between safeguarding our clients and the wider system and giving everyone a striking chance to lead a productive, healthy and quality livelihood.” Even so, insurers writing business in Africa face growing pressure from Europe-based reinsurers to exit fossil fuels businesses, forcing a weighing up of concerns for the environment against potentially poor social outcomes.
“The insurance industry, whose core business is to manage risk, must lead in understanding a rapidly changing risk landscape and address global sustainability issues with rigour and innovation,” says Dr Mgoqi. “The scale of these issues is too big for any one institution to tackle and will require collective action and long-term solutions to resolve.” Although banks and insurers can influence carbon emissions reductions through their financing activities, they must proceed with care where environmental and social issues overlap. In the South African context, banks and insurers need to consider how a move from carbon emissions could adversely affect communities who depend on the coal industry for their livelihood. The solution entails a holistic consideration of the impact of each decision on the community.
There are many examples of how public-private partnerships can help drive sustainable strategies. For example, the partnership between the German government and its automotive industry on electric vehicles. An article by Andrew Kidd, published 16 August 2022, reveals that a subsidy initiative on electric vehicle sales resulted in 600,000 more electric vehicles on the road. Germany is also gradually phasing out the use of coal to generate electricity by 2038. “Collaborative engagements and active participation are critical to determine the best ways to meet ESG requirements and assess the implications,” says Dr Mgoqi.
South African regulators, including National Treasury, the Prudential Authority (PA) and the South African Reserve Bank (SARB) have a strong interest in bank and insurer sustainability, but their focus tends to be on solvency. We asked Dr Mgoqi how capital management or solvency fit into the sustainability puzzle. More importantly, we wanted to know whether trading profitably had a place in the sustainability debate. In other words, since banks and insurers operate for the benefit of their shareholders, can an argument be made that non-profitable also means non-sustainable?
“Given the continuous and evolving impact of climate change on the frequency and intensity of natural catastrophes, we tend to agree with the need for a regular reassessment of the capital requirements for natural catastrophe; the reassessment and integration of considerations on climate change re perils and impacted regions is necessary to ensure the solvency of the insurance sector against rising physical risk exposures,” says Dr Mgoqi. This explains why a climate scenario analysis is included in the insurers’ Own Risk and Solvency Assessment (ORSA), as part of the prudential European Solvency II directive. The ORSA is also a requirement of South Africa’s Solvency Assessment and Management (SAM) regime.
“A lot of progress has also been made within the solvency framework in addressing sustainability risks,” comments Dr Mgoqi. “We need to have financially solid institutions that provide the required sustainability for us to be able to invest in sustainable strategies… and overall, we do need to ensure that solvency, the capital adequacy of companies, is maintained so that we can manage customer expectations and advance ESG.” The bank and insurance sectors have come a long way in realising their responsibility in driving E and S outcomes within the ESG framework.
Today’s challenge is to achieve continuous improvements on these measures while in the light of fast-approaching deadlines: 2030 is a mere eight years away. “The business of insurance is not as stable and predictable as we have known; in the unpredictability of our environment lies an opportunity to continue to deliver value to our stakeholders through finding relevant solutions that offer competitive advantage and ultimately delivering the profits to our shareholders,” Dr Mgoqi concludes.
“We understand the imperatives of being able to provide economic resilience while providing sustainable solutions for our customers, but we must also consider how we promote sustainable approaches that improve our clients’ resilience to climate changes… this requires offering underwriting products that encourage sustainable choices both on the business side and in outcomes for buyers of insurance.”
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