Enhancing corporate ESG strategy with EIL insurance
Beyond the support EIL insurance can give to a corporate risk management strategy, environmental cover can help demonstrate corporate social values.
Governments, businesses and consumers are becoming increasingly aware of, and concerned by, the impact of humanity on the environment. With this shift in public awareness and government policy, companies are being faced with new risks around their ESG exposures, activity and reporting. In turn, this has driven a new suite of insurance products to enter the market.
One such product is environmental impairment liability (EIL) insurance. EIL is a specialized insurance policy that covers losses or damages arising from pollution events, thereby protecting companies affected by unforeseen environmental impacts.
To date, many organizations have relied upon the pollution coverage provided by general liability and property policies to manage environmental risks. However, there are significant limitations to these general forms of insurance, making EIL coverage more critical as businesses face greater scrutiny over the environmental impact they may be having.
EIL insurance can do more than just protect firms against the costs associated with pollution. If the right environmental liability policy is purchased, it also can enhance an organization’s risk management strategy and help communicate to their stakeholders a commitment to embedding more sustainable practices.
EIL insurance as a key component of a risk management strategy
First, to achieve a holistic ESG strategy, a firm must implement a cohesive, enterprise risk management (ERM) process that captures the following:
- Risk assessment and measurement
- Risk reporting
- Risk response
- Risk governance
- Risk strategy and appetite
Second, for the ERM process to succeed, a company will need to devise a risk register. This living document should be updated and refined continuously to capture the main business risks an organization is facing at strategic, financial, operational, external (macroeconomic), compliance, country and reputational levels.
Once risks are assessed and measured for likelihood of occurrence and significance of impact, they can be graded for acceptability. Unacceptable risks need to be managed through risk mitigation or insurance protection.
After high-severity risks have been managed and mitigated, if they still provide unacceptable volatility to an organization’s success, they can be offset through EIL insurance – an effective risk mitigation measure that provides balance sheet protection.
However, an environmental policy can do more than provide financial security. Purchasing EIL cover enables an organization to demonstrate to key stakeholders – including employees, customers, the local community and shareholders – that it has carefully considered and identified environmental risks and is actively working to effectively mitigate them.
Pollution commitments and support provided by EIL insurance
To integrate a fully rounded ESG strategy, a company needs to address its current obligations to the environment and have pollution commitments and robust pollution mitigation procedures in place. To ensure these obligations and measures are fully integrated, particularly at an operational level, the risk register needs to include an assessment and grading of the company’s potential to pollute. Based on this assessment, processes, controls and a protective infrastructure can be introduced, including employee education on the hazards and storage requirements of any chemicals or other potential pollutants. Emphasizing the identified dangers and refreshing employee training, according to the potential hazard, are also key parts of maintaining a mature risk management framework.
Depending on exposures, a spill response plan can be critical to ensure a business is prepared for a pollution event – thereby minimizing its impact on the local environment. The spill response plan will outline detailed safety measures for the benefit of the workforce and any third parties potentially exposed. It will also ensure that appropriate spill kits are available while outlining procedures for containment and, depending on the scale of the spill, the appropriate process of notifying relevant authorities of a pollution event.
Making certain spill response plans, risk management guidelines and risk registers are refreshed regularly and living documents accurately reflect an organization’s operations are essential to demonstrating proactive risk management.
So, where does EIL come in?
An environmental policy will underpin and provide a backstop in the event the environmental risk mitigation and risk management procedures do not prevent the impact of a pollution event. This insurance protection can help remove operational volatility as well as provide rapid access to experts in environmental remediation in a way other insurance products cannot. In short, should the worst happen, an EIL policy makes a company better equipped to respond, manage and minimize damage.
Using EIL insurance to communicate CSR
Beyond the support EIL insurance can give to a corporate risk management strategy, environmental cover can help demonstrate corporate social values. It is a company’s conscious commitment that provides evidence – to its employees and local communities – of their duty to protect the environment and society at large.
By complementing an organization’s formal response process to an event that impacts third parties, internal crisis management expenses and public opinion, EIL insurance helps to cement a firm’s commitment to corporate social responsibility (CSR). Additionally, it can assure internal and external stakeholders that pollution damage (whether historical or present) is managed thoughtfully, responsibly and within an appropriate timeframe.
EIL insurance is continuing to evolve as pollution events become more complex, but its value is well-established, and the importance of environmental cover is becoming more apparent as increasingly stringent environmental directives are put in place.
However, when a company seeks out an environmental carrier, it is imperative they understand the nuances of the coverage. Similar products are offered across the marketplace, but not all are created equal.
Businesses should review their environmental liability risks and how their activities impact the surrounding environment to ensure that a chosen policy works for their individual needs and, most importantly, keeps them compliant with the latest set of regulations.
Richard Spink is Aspen Insurance’s head of international environmental liability and Penny Andrews serves as environmental underwriter.