How is ESG affecting the construction sector?

Environment, Social and Governance (ESG) standards form the criteria for determining the long-term viability and ethical impact of a business. 

According to a September 2021 report published by the Royal Academy of Engineering, the built environment accounts for circa 40% of carbon emissions in the UK. It is clear to see why there is a sharp focus on the construction sector and the need to meet targets to reduce emissions and improve the environment in which we live and work.

Under ‘Social’, a key issue affecting the UK construction sector at the moment is a shortage of workers, and according to recent studies, to meet existing project output levels the construction industry must recruit more than 43,000 new entrants per year for the next five years. Attracting and retaining a company’s most important assets, human capital, is becoming a real challenge and post Brexit the sizable pool for EU workers (that made up close to 8% of the UK’s construction workforce) has diminished substantially, further exacerbating the issue.

The assessment of a company's ‘Governance’ under ESG is based on a number of variables, some of which are directly tied to the company culture and decision-making procedures and others which lean more towards societal considerations, such as diversity of the company’s board of directors. 

Why and how are PI insurers using ESG as part of the underwriting process?

Over the last 12 months, insurers have been placing growing attention on a firm’s approach to ESG when reviewing risks. How an insured tackles ESG related factors is often a barometer for their approach to governance and risk generally, and insurers are looking to place their confidence in firms that are strong in this area in the likelihood of reduced claims. 

Equally, with a growing number of insurers declining to underwrite fossil fuel exposures or projects in geographical areas that are more sensitive to environmental damage, a firm which is considerate of its environmental impact and taking action towards reducing its carbon emissions is music to the ears of insurers. 

Below is a list of ESG factors that insurers are using when reviewing firms. 

Environmental

• Sustainability
• Climate change and resource conservation
• Pollution/waste management
• Nuclear energy
• Compliance with environmental law

Social

• Human capital development
• Diversity & Inclusion
• Working conditions, including health & safety
• Supply chain interaction
• Consumer protection

Governance

• Board/management diversity
• Business ethics
• Accounting transparency
• Executive compensation
• Anti-bribery and corruption
• Conflict resolution  

What can construction firms do?

Clearly articulating your firm’s stance on ESG to insurers as part of your renewal strategy is critical. PI insurers are now asking for more information from insureds before quoting and a renewal submission goes well beyond a simple proposal form. If your insurance broker has not proactively explored your stance on ESG you should challenge why as providing supplementary information around your approach to ESG will help to differentiate your business, demonstrate an elevated level of commitment to these important standards and, ultimately, produce better outcomes. 

At Miller we work tirelessly with our clients to help them understand the issues important to insurers, and to build a risk prospectus capable of enabling insurers to provide the best quotes possible. Please contact our specialists for guidance and support, they are ready to assist.

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