Chaucer leads industry with ESG balanced scorecard

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Before he became a senior executive at the London-based re/insurer Chaucer Group, Simon Tighe used to find it curious that so much attention was devoted to the industry’s more glamorous cousin, banking.

Where was the acknowledgement that insurers deploy trillions of dollars in capital, and help to protect bank customers from catastrophic losses? Also, why wasn’t there an insurance equivalent of a credit rating to help grade the level of counterparty risk at the critical point of underwriting?

“I think our industry tends to see itself as the poorer cousin of banking and says to itself: ‘Well, that’s where all the glossy and sexy stuff is, and we’re just here to pick up the scraps’,” Mr Tighe said.

 

Simon Tighe, Chaucer Group Head of ESG

“But then you realise that insurance and reinsurance is one of the largest investors of capital in the world, and there’s not another market or industry with the impact or ability to incentivise clients to make themselves more sustainable.”

If they faced a similar conundrum, and assuming they recognised it in the first place, the vast majority of people would simply accept the status quo.

Mr Tighe chose differently, leading his then-employer, a specialist insurance provider, down the innovation path.

At the time, re/insurers were examining the sustainability of companies in their investment portfolios by taking a tick-the-box approach more aligned with credit risk in banking.

While the process identified the companies likely to still be around in 3-5 years when re/insurers wanted their money back, it ignored the core issue for underwriters – recognising potentially “sticky” customers.

Mr Tighe began incorporating environmental, social and governance (ESG) benchmarks, only to encounter more frustration.

While the ESG phenomenon was taking off, particularly after the Paris Agreement on climate change was signed in 2016, there was a huge focus on the “E” in ESG and little recognition of the importance of “S” in the sustainability equation.

“It used to drive me crazy because the social drives the environmental – if the social is not working well then the environmental is going to be harmed immeasurably more,” Mr Tighe said.

“You’ve got to make sure both of those work, and the “G” part, governance, must work as well, so we started to develop metrics to enable the portfolios to invest according to 7-10 key benchmarks, such as board composition and impact on the local community.”

Mr Tighe joined Chaucer in 2017, taking the sustainability project with him and adding investments to his job description the following year.

While the board was initially sceptical that there was a commercial opportunity in the project, the directors shifted ground after two-and-a-half years, believing that a balanced ESG scorecard to help determine risk in the underwriting process could help Chaucer identify opportunities.

There were several twists and turns to come, the most notable of which was a game-changing introduction for Mr Tighe and Chaucer head of strategy and innovation Hayley Maynard to Moody’s Analytics.

Moody’s, with its unique treasure trove of data on 480 million companies around the world, became an important partner, combining its risk modelling expertise with Chaucer’s insight into counterparty risk to produce an objective measurement of ESG.

The scorecard which emerged in September 2022 from 18 months of planning uses 158 unique data points, including disclosure of greenhouse gas emissions, integration of environmental factors into the supply chain, the health and safety conditions of workers, involvement in the local community and support of local infrastructure, and boardroom diversity.

Scores are assigned across ESG benchmarks, measuring sustainability in underwriting, operations and investments and weighted to counterparties contribution to the Un Sustainability Goals.

The aim is to enable re/insurers to use the tool not only to manage their own ESG profiles but also to better understand potential risks and areas for improvement related to the ESG of their customers.

John Fowle, who was chief executive of Chaucer at the time, said the re/insurance industry has a critical role to play in helping corporates to make the transition to become more sustainable.

“This isn’t going to happen overnight but by helping clients identify, manage and measure areas that are in need of improvement, we can help them implement incremental changes that will pay dividends in the long term,” Mr
Fowle said.

“Re/insurers also need to consider their own ESG profiles and what action the industry can take to improve its credentials.

“The data provided through the ESG balanced scorecard will help Chaucer and other re/insurers establish their strengths and weaknesses and give them a steer on which areas need greater attention or investment.”

The Chaucer/Moody’s solution is automated, so once a company discloses relevant information it’s automatically picked up and included in the scorecard.

There is no impact on product pricing, capacity, turnaround times for quotes or policy conditions. Indeed, sustainability should help the decision-making process, not determine the outcome.

The overriding view is that true progress on sustainability can only be measured once the data which is fed into the scorecard is auditable.

Then, as trust in the scorecard increases, the market will commensurately reward companies for better disclosure and greater transparency, quite apart from any push from global regulators.

Mr Tighe said the scorecard was probably 2-3 years ahead of competitor products Chaucer opting to take a philanthropic approach by publicly disclosing all information related to the scorecard’s development.

It is also leading an insurance market group to remove friction in the way that the industry collects the data by developing a standardised approach.

Consistency is seen as important to achieve meaningful change in industry practices.

But it’s not as though Chaucer is resting on its laurels.

“With Moody’s we’ve been developing how the underwriters digest the data and how they look at it to ensure they get a very specific underwriter’s tool,” Mr Tighe said.

“Rivals – and I’ve told them this – are building solutions that they think people want. They’re building it and then they say: ‘Here it is. This is what you want when it isn’t what we want at all’.”

The Chaucer executive openly conceded there is a long way to go before the data is sufficiently reliable to make commercial decisions.

Chaucer, for example, has 35,000 unique counterparties, admittedly a lot less than the hundreds of thousands doing business with each of the global heavyweights.

While the potential for productive data-sharing with Moody’s is amply illustrated by the 78-80 per cent overlap with companies in both partners’ data bases, it’s not uncommon for data quality in percentage terms to register in the single digits; for example, the Chaucer data quality score on all counterparties is in the single digits.

“We’ve not tried to massage it and say that’s fine; in fact, what we have said is that you can’t use this for anything,” Mr Tighe said.

“We just want to be on the right trajectory and that’s where we are – we’re getting better.

“But I’m a firm a believer that we need to get to a data quality score of 51 per cent before we can make decisions.”

 

The information contained in this article is based upon sources believed to be reliable but which have not been independently verified. Opinions or ideas expressed may not necessarily be those of National Australia Bank Limited (NAB) nor may they necessarily reflect NAB’s views or endorsement. This article is for informational purposes only.

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