Richard Sheng, Board Secretary and Brand Director, Ping An Insurance Group, gives advice on integrating environmental, social and governance factors into corporate risk management systems.
In recent years, international capital markets have paid more attention to the environmental, social and governance (ESG) performance of companies, and investors have increasingly incorporated ESG into their investment decision-making process.
ESG provides a non-financial perspective to analyse the medium and long-term development of a company. Facing the current complicated business environment, what are the specific and wider impacts of ESG? How does one incorporate ESG into a company’s existing risk management system? How can ESG guide asset management?
This article will use Ping An as an example to explore specific ways to integrate ESG into a company’s risk management system.
Crises and ESG
During the current Covid pandemic, global financial markets have made ESG the focus of market policies in the pursuit of long-term stability. According to the Global Risks Report 2021 issued by the World Economic Forum, environmental issues such as extreme weather and climate change have accounted for four of the top five global risks in recent years. A report published by The Network for Greening the Financial System also states that central banks and regulators around the world are forming a new consensus that environmental and climate-related factors have become one of the major causes of financial risks.
The Bank of England estimates that if the global financial industry does not cooperate with government climate policy and take action, it may lead to US$4–US$20 trillion in losses. However, if companies address ESG issues correctly, they can embrace new opportunities in the process of transformation.
Research by the Goldman Sachs long-term investment strategy team shows that globally there is the potential for US$600 billion in revenue gains from low-carbon initiatives. A report published by the Intergovernmental Panel on Climate Change – Unlocking the Inclusive Growth Story of the 21st Century – pointed out that by 2030 low-carbon initiatives are expected to bring economic gains of up to US$26 trillion.
In the Mainland, changes in macro development goals also provide ESG-related business opportunities. In September 2020, President Xi Jinping announced that the Mainland will aim to hit peak emissions before 2030 and carbon neutrality by 2060. Policies in the post-pandemic era have also brought opportunities for clean energy, green bonds and green equities. The size of the green bond market has reached more than RMB1 trillion, and the scale of green credit reached RMB11.55 trillion by the end of 2020.
In recent years, the attention to ESG has resulted in regulatory reforms. The EU Sustainable Financial Disclosure Regulation requires a strict ESG management framework for financial institutions. The UK, New Zealand and other countries have encouraged, or forced, financial institutions to conduct climate risk scenario tests and asset risk quantifications, and have required disclosures under the Taskforce for Climate-related Financial Disclosures (TCFD) framework.
ESG has also received the attention of financial authorities in the Mainland. Since 2020, policies have been introduced that require all listed companies to comply with environmental disclosure requirements, which has guided the transformation of financial institutions. For financial institutions, no matter whether it is due to the escalation of the global pandemic, or the evolution of regulatory trends, introducing ESG factors into existing risk management models is essential.
ESG and risk management
Since not all ESG issues will trigger corporate-level risks, managers need to identify relevant ESG risks in external environments and assess their impact on the company. Moreover, ESG risks often overlap with existing financial risks, so companies should incorporate ESG-related management mechanisms into their existing risk management system.
In Ping An’s experience, ESG could be integrated into five risk management categories – asset management, liquidity, information security, compliance and operations, and brand reputation risk. In response to the different types of ESG risks, companies need to mobilise internal management and internal controls to improve the resilience of their business and operations.
Ping An continues to pay attention to the company’s sustainable development goals and social responsibility. The Group has successfully integrated ESG into its existing ‘251 risk control system’. The system has three main components, establishing:
- a two-tier structure in the Ping An Group and its subsidiaries (the former is responsible for overall planning and supervision, and the latter launches an ESG matrix to achieve dual risk management and control)
- a management and control system covering the above five types of
risks in accordance with international risk management and control standards, and
- a collaborative management and control platform, including a unified ESG system and an ESG management platform that uses artificial intelligence (AI).
Based on the 251 system, Ping An has planned an effective ESG action map that covers a wide range of topics and integrates ESG concepts within the Group’s risk management framework.
- For asset management risks, determine the macro-level investment strategy and integrate ESG-related risks such as climate change into investment analysis. Form responsible investment management norms applicable to different types of asset investment and formulate a positive asset portfolio that meets the carbon neutralisation target.
- For liquidity risks, Ping An relies on technology to integrate ESG into all aspects of property insurance development, underwriting, claims, product management and reinsurance.
- In response to compliance risks, Ping An attaches importance to the practice of business ethics. The group formulates employee business codes, pays attention to fair competition and anti-corruption, has created a sustainable supply chain and upgrades its carbon neutral goals.
- In response to information security risks, Ping An has formulated ethical goals for the use of data, algorithms and applications. The group has established AI ethics committees, AI ethics management systems and evaluation standards for the challenges of AI.
- In response to brand reputation risks, Ping An is committed to creating value for shareholders, customers, employees, communities and the environment, and seeks to enhance both commercial value and social value that will help people live a better life.
With the help of the unified ESG management tool, AI-ESG Management and Investment Platform (AI-ESG), Ping An is able to coordinate the above actions and promote ESG factors to the group’s risk control system in a scientific and intelligent way. AI-ESG includes an integrated management platform and an investment platform. The former provides ESG information disclosure and rating analysis, process management and public opinion monitoring to improve the efficiency of ESG performance within the group. The latter is built through multi-channel data collection and intelligent analysis.
Ping An has invested more than RMB5 trillion in the measures discussed above and makes sure that the group’s sustainable development policies are firmly implemented.
ESG issues have attracted attention in both domestic and foreign markets, and have resulted in risks, competitive challenges and opportunities for companies that were not part of the traditional business environment. For this reason, governance professionals need to strengthen the examination of ESG risks in investment activities and business management. Different departments should also be integrated to adapt to the changes in policy and supervision to improve the resilience of companies’ management of ESG issues.
Board Secretary and Brand Director, Ping An Insurance Group