Financial institutions are facing mounting pressure to embed environmental, social, and governance (ESG) considerations into every part of their business. Underwriting is no exception.
Whether insuring real estate, lending to corporates, or pricing new products, underwriters now have to consider how ESG risks (especially climate-related ones) might affect the long-term viability of what they’re backing. This shift is being driven by investor scrutiny, growing regulatory expectations, and the financial toll of unaddressed ESG risks.
The problem? Many insurers and lenders still don’t have a clear, consistent way to evaluate ESG risks during underwriting. That’s what this piece aims to solve.
What is ESG underwriting?
ESG underwriting embeds ESG signals directly into how financial institutions assess, price, and approve risk. For example, when underwriting property insurance, an insurer might assess whether a building is located in a high-flood-risk area, what mitigation measures are in place, and whether the asset aligns with the company’s long-term exposure limits. In lending, an underwriter might flag a borrower with a weak emissions reduction plan or gaps in human rights due diligence.
And while climate risks often get the spotlight, social and governance risks matter too. Poor governance can signal weak risk controls. Weak labour protections in supply chains can pose reputational risks or lead to future legal liabilities.
ESG underwriting is the process of assessing environmental, social, and governance risks—like emissions exposure, climate adaptation, and labour practices—as part of lending or insurance decisions. It extends traditional risk assessments to account for the growing materiality of ESG issues.
Unlike conventional underwriting, which often relies on historical data and financial indicators, ESG underwriting looks forward. It considers how climate risk, for example, might affect the value or insurability of an asset over time. It might also screen for governance issues that increase the chance of litigation or reputational harm.
The challenge? There’s no universal template for ESG underwriting. Approaches differ across financial institutions, and ESG data is often siloed or hard to apply at the policy or deal level. Still, the pressure to act is rising.
Why ESG underwriting is gaining traction
Insured losses from natural catastrophes reached USD $108 billion in 2023, according to Swiss Re. As climate-related risks rise, the financial stakes for insurers and lenders grow too. Institutions are also responding to rising shareholder demands. Large institutional investors are asking tougher questions about how ESG is integrated into day-to-day decision-making, including underwriting.
Reputation matters here as well. Supporting clients with high ESG risks can create brand damage, especially if those risks materialize and lead to harm. ESG underwriting helps institutions show they are putting their capital behind companies and assets that align with their risk appetite and stated values.
Regulators, investors, and customers increasingly expect insurers and lenders to understand and manage ESG risks. They want to know how ESG considerations are shaping real-world decisions, like how a loan is priced or whether a property is insurable.
In the U.S., the Office of the Comptroller of the Currency (OCC) and the Federal Reserve have both issued climate risk management principles for large banks. Canada’s federal banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), recently ran its first climate scenario analysis exercise with major banks and insurers.
Large U.S. insurers are beginning to improve their climate disclosures, but most still lack a clear, decision-useful view of how climate risk affects underwriting.
Globally, frameworks like the International Sustainability Standards Board (ISSB) and the European Union’s Corporate Sustainability Reporting Directive (CSRD) are pushing institutions to analyze and disclose climate risk across their portfolios, including underwriting.
ESG underwriting is not about politics or PR. It’s taking place behind the scenes as a core function of risk management.
Challenges financial institutions face with ESG underwriting
Despite growing pressure, most organizations are still figuring out what ESG underwriting looks like in practice. There are three big roadblocks:
- Lack of a clear framework: ESG risks vary by sector, geography, and product. Most underwriters don’t have a consistent methodology for evaluating these risks across clients or portfolios.
- Fragmented data: ESG data is often unreliable, hard to compare, or not decision-useful. Teams struggle to translate broad disclosures into company-level insights.
- Workflow tensions: Underwriting teams are under pressure to move fast. ESG analysis can slow things down, especially when it’s manual, inconsistent, or poorly understood.
Key elements of an ESG underwriting approach
To overcome these challenges, institutions need to build a structured approach to ESG underwriting. That starts with three pillars:
Data and metrics
Effective ESG underwriting starts with the right data and knowing what’s decision-useful for different types of risk. For insurers, physical climate data like floodplain maps or wildfire exposure can determine whether coverage is feasible. For lenders, transition risks, such as a company’s dependence on fossil fuels or its decarbonization pathway, can affect creditworthiness over the long term.
Financial institutions may also use proxy indicators when direct ESG data isn’t available. For example, a company with no board-level oversight of ESG may be flagged as higher risk, even if other disclosures are in place. That might include:
- Climate risk exposure (physical and transition)
- Greenhouse gas emissions (Scope 1, 2, and material Scope 3)
- Board oversight of ESG issues
- Social metrics (e.g. health and safety, diversity, human rights)
Collecting this data is only the first step. Underwriters also need tools to evaluate it quickly and consistently.
Risk evaluation and scoring
Once ESG risks are identified, they need to be scored and weighted. Some institutions are developing tiered frameworks to separate low-, medium-, and high-risk clients based on ESG maturity. For instance, two companies in the same industry might differ significantly in how they manage water use, emissions, or community relations, and that difference might warrant a different insurance premium or lending term.
Still, even the best scoring models rely on human interpretation. Underwriters need clear, consistent processes to evaluate edge cases and avoid bias. Some institutions are building ESG heatmaps or using internal scoring models. Others tier risks based on sector benchmarks or red flag indicators.
Subjectivity is still a challenge here. Without common standards, ESG scores can vary widely. That’s why consistency and transparency are critical, especially if scores feed into pricing or approval decisions.
Governance and accountability
Embedding ESG into underwriting requires more than just new data. It demands new capabilities and institutional alignment. Underwriters must understand how ESG risks translate into financial impacts and how to escalate concerns.
For example, a strong governance process might require dual sign-off on underwriting decisions involving clients flagged for material ESG concerns. This not only improves oversight but also builds institutional muscle memory for handling ESG complexity over time. It demands new capabilities.
Institutions need to:
- Train underwriters on ESG materiality
- Set clear ESG review protocols
- Establish oversight mechanisms for controversial or high-risk decisions
Strong governance makes ESG underwriting scalable. It also reduces the risk of greenwashing or inconsistency across teams.
How ESG underwriting supports strategic risk mitigation
When executed effectively, ESG underwriting helps avoid risk and unlock opportunity.
Some banks are now tying loan terms to ESG performance. For example, borrowers might get better rates for meeting sustainability targets. In insurance, ESG underwriting can help identify which assets are too risky to cover, or where new products (like flood insurance for climate-resilient buildings) can be introduced.
It also supports alignment with net-zero goals. If underwriting practices don’t reflect an institution’s climate targets, there’s a risk of misalignment across the business.
| Case study: How Gore Mutual is building climate competence Gore Mutual, a mid-sized Canadian insurer, recognized the need to get a handle on climate risk. But like many mid-sized institutions, they needed help turning climate ambition into action. The company partnered with Manifest Climate to evaluate the maturity of its climate strategy and benchmark its disclosures against global peers. This gave Gore Mutual a clear, structured view of how it was performing across governance, risk management, metrics and targets, and strategy. Using insights from the platform, Gore Mutual identified gaps and opportunities across its underwriting, investment, and risk functions. The company used the findings to inform internal education, align teams on climate priorities, and build the foundation for stronger climate governance. Underwriters in particular benefited from clearer visibility into climate-related risks at the portfolio level, helping them make more informed decisions on future policies. By integrating climate insights into their core operations, Gore Mutual is building a more climate-resilient business that can meet both regulatory expectations and customer needs. Read the full case study |
Practical steps to integrate sustainability into underwriting workflows
Integrating ESG into underwriting doesn’t have to mean reinventing your entire approach. In fact, layering ESG into existing workflows often works best when it starts with what you already know. Here’s how to take the next step:
You don’t need to reinvent the wheel to get started. Here’s how leading institutions are integrating ESG:
- Map the current state: Identify where ESG factors are already considered in underwriting, and where the gaps are.
- Set clear goals: Define what ESG integration means for your institution’s products, risk appetite, and timelines.
- Leverage external tools: Use platforms like Manifest Climate to evaluate client disclosures, surface material ESG risks, and benchmark policies against evolving expectations.
- Build internal knowledge: Train underwriters and risk managers on ESG data interpretation and materiality across different sectors. Help them understand how ESG risks manifest differently across industries, from fossil fuels to agriculture to tech, and how those risks translate into real-world consequences. Avoid relying too heavily on off-the-shelf ESG ratings, and instead focus on building judgment through training and case reviews.
- Monitor and improve: Track ESG risk exposure across portfolios and refine approaches over time.
Strengthen ESG underwriting with Manifest Climate
Manifest Climate helps financial institutions move from ESG intent to ESG action.
Our AI-powered platform turns climate disclosures into decision-useful insights that underwriters can use to assess ESG risk consistently. Whether you’re reviewing a new policy, evaluating a loan application, or setting risk thresholds, Manifest Climate helps you:
- Identify ESG disclosure gaps
- Benchmark client disclosures against peers
- Surface climate-related risks and opportunities
- Ensure consistency across underwriting assessments
- Stay ahead of regulatory expectations
Institutions like National Bank and Capital One already use Manifest Climate to strengthen their ESG risk processes. Our platform bridges the gap between ESG research and underwriting action.
Book a demo to see how we can support your underwriting workflows.
