Effects from ESG Scores on P&C Insurance Companies: Comparison
Please note this is a comparison between Version 2 by Dean Liu and Version 1 by Silvia Bressan.

Insurers act as institutional investors and underwriters of risk. Therefore, improving their environmental, social, and governance (ESG) performance is important for the transmission of ESG values to all economic sectors.

  • insurance
  • ESG
  • sustainability

1. Introduction

The stable trend of equity capital flowing into environmental, social and governance (ESG) funds forces managers of insurance companies to deal with ESG strategies. The continued growth of “green” and sustainable funds means to insurers that they must actively monitor and promote their ESG ratings in order to retain full access to capital and manage the potential impacts on their stock prices. Thus, ESG practices would prevent firms from being excluded from ESG funds and indices (ESG is the term used most commonly in relation to investment products and underwriting. WResearche rs use this terminology throughout the paper, and weresearchers call “sustainable insurers” firms that have high ESG ratings). To address sustainability risks, the United Nations Environment Programme Finance Initiative (UNEPFI) has produced a guide for the global insurance industry—the Principles for Sustainable Insurance (PSI), founded on the key principle that “insurers will incorporate ESG issues relevant to their business in their own decision making” (https://www.unepfi.org/insurance/insurance (accessed on 19 April 2023)).
Recently, the topic of sustainability has received much more attention from regulators and policy makers. Therefore, there is also vivid academic research on the effects of ESG on corporate finance. Scholars strive to measure the benefits from integrating ESG values in the management of corporations. One of the main issues is to establish whether high ESG profiles would enhance financial performance of companies. Theoretically, it has been proved that risk-averse investors have a preference for ESG, for example, by [1], and more recently by [2,3][2][3]. This implies that, in the cross-section, high-ESG firms are discounted at lower rates than low-ESG firms. In turn, this would mean that more sustainable companies enjoy cheaper financing costs while delivering high value to equity holders. Nonetheless, the empirical evidence is very heterogeneous, and the literature is inconclusive on the correlation between ESG scores and the performance of financial assets. Different articles prove that it may be positive, negative, or event nonexistent, depending on the samples under study and the methodologies implemented. Contributions in this field are numerous, and an exhaustive review can be found in [4] and, more recently, in [5].
In the existing literature, there is a lot of limited empirical evidence on the impact of ESG inside insurance companies, as the standard practice is to examine financial intermediaries separately due to considerable differences in their business model and regulation. This gap of knowledge provides motivation to our the goal of conducting an analysis focused on the insurance sector, i.e., a business playing a key role for the functioning of the entire economic system. Thus, studying financial strength of insurance companies and its relationship to ESG policies appears of paramount importance.
Some previous articles document the benefits from ESG in insurance. For example, in [6], the authors show that ESG scores enhance the stability of American insurers, while the authors of [7] illustrate that ESG rating upgrades generate abnormal stock returns inside European insurers. However, there is a lack of extensive evidence showing that ESG practices would effectively change the financial conditions of insurance companies. WResearchers now take up this challenge and analyze a sample of worldwide P&C insurers during 2013–2022. 

2. ESG Impact on Insurance

The growing concerns of regulators and policy makers about ESG topics provide a strong incentive for academics to conduct research aimed at acquiring knowledge about the impact of sustainability on corporate finance decision making. Nonetheless, a large majority of the previous articles has addressed sustainability issues by analyzing data from non-financial firms or indices, while only few studies focused on the insurance sector. This, instead, is the focus of our article. 
The author of [9][8] use a transparent framework to assess the integration of corporate social responsibility in the business of 153 international insurers in 2007. The author finds a high level of variability across countries and firms, with social and ethical aspects of corporate social responsibility being better integrated than environmental aspects.
Only a few studies use the ESG scores of insurance companies to test their relationship with financial dimensions. For American insurers during 2006–2018, in [6], the authors illustrate that the increasing ESG scores diminish distress risk as measured by z-scores. The conclusion is that sustainability enhances the financial stability of insurers, while the data also reveal that this effect is stronger for the social and environmental pillars but not for the governance pillar. In [10][9], data are used from large United States insurers to implement a two-step method that first elaborates a measure for ESG awareness [11][10] and then relates such quantity to firm-specific characteristics. ESG awareness is found to be more significantly determined by the firm solvency, profitability, and size. In [12][11], sustainability is associated with the purchase of reinsurance. The author finds that high-ESG firms are more profitable and cede less risk to reinsurers. The author argues that sustainable insurers are less risky, and can save on reinsurance costs.
In the existing literature, the correlation between ESG scores and financial performance is found to be positive, negative, or even nonexistent (as in the survey in [4] about 2200 empirical papers that examine the association between ESG and corporate financial performance. The large majority of studies reports that ESG enhances performance in a stable way over time. More recently, in [13][12], findings were presented from a survey of 1141 papers and 27 meta-reviews published between 2015 and 2020, revealing that the financial performance of ESG investing is similar to conventional investing, with one third of studies showing superior performance). For the insurance industry, the evidence is very limited; therefore, it remains an open empirical issue to establish whether sustainable insurers deliver superior returns to investors. In study [7], the effect of ESG ratings on the stock price of European insurance companies is examined using an event study methodology. The results suggest that stock prices are highly responsive to ESG ratings, as the authors find that an upgrade in the ESG rating results in a significant stock price increase, while a rating downgrade leads to a decrease (The stock market reaction to responsible investments remains an open issue in the literature, as, for example, in [14][13], where it is shown that socially responsible investments of banks do not command positive market premiums. Another possible way through which ESG would affect stock prices could also be through incentives for earning management [15,16][14][15]. In [17][16], a mediation effect model is used to prove that market values of Chinese firms improve with ESG ratings through their increased operating capacity, while in [18][17], audit fees and controversies are among the channels that establish a link between the ESG ratings and the financial performance of European banks).
Following this stream of research, we analyze international P&C insurers and examine the relationship between ESG scores and measures of financial strength, in addition to stock market valuations. In this way, we integrate with new results the previous research addressing the hypothesis that sustainability creates value in the insurance industry.


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