About the author
William Watts
William is a Consultant at Oxbow Partners. He holds a Bachelor's degree in Philosophy, Politics and Economics from the University of Oxford
Contact William20 April: What’s going on in ESG and insurance?
April 20, 2023 William Watts
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The week’s topic: Developing, transforming, and implementing ESG frameworks
Read our summary and analysis below.
Analysis
Developing, transforming, and implementing ESG frameworks
Climate action and the road to net-zero is an ‘unavoidably uncertain transition’. That is according to Sarah Breeden, Executive Director of Financial Stability, Strategy and Risk at the Bank of England in a recent speech hosted by the Global Association of Risk Professionals.
Managing this uncertainty means developing the right tools to assist in the transition to a sustainable future. The frameworks for implementing and integrating ESG into the board room agenda are not sitting in front of our eyes but rather need to be discussed and agreed upon, both by businesses but also regulators. Debate and difficult discussion are inevitable; how should we, for instance, regulate ESG research or deal with sustainable finance disclosures. The latter issue has seen EU regulators opening a new consultation on proposed new reporting tools with stakeholders to be concluded on July 4th.
Such conversation can yield results, though. Take, for example, last week’s meeting of insurance regulators and operators in Nairobi, Kenya where there was a commitment by African insurance industry leaders to support the UN sustainable development goals. In London, a June conference will see 150 senior executives responsible for the sustainability activity of major insurance players gather and discuss how wider strategies relating to climate change and net zero transition can be successfully developed and explained to stakeholders with appropriate use of ESG metrics.
None of this is to say that the road will be free of bumps. Hannover Re have become the third high profile re/insurer to leave the UN-convened Net-Zero Insurance Alliance and a recent Asia Pacific report found that half of insurers surveyed have not yet started on net-zero integration. Ultimately, though, the path through difficulty and uncertainty is the development of proper frameworks emerging through the nexus of government, regulatory and business engagement in difficult but fundamentally necessary conversations. Only in this way can Sarah Breeden’s prophesy of an unavoidably uncertain transition be made just a little bit less uncertain.
Summary
Developing, transforming, and implementing ESG frameworks
Climate action: approaching a tipping point? − speech by Sarah Breeden (Bank of England)
Sarah Breeden, Executive Director of Financial Stability, Strategy and Risk at the Bank of England and Financial Policy Committee (FPC) member reflected that we are making good collective progress in turning aspiration into climate action in a recent speech to Risk Professionals. However, we have not yet reached the tipping point where we have the skills and tools that drive the right actions in an unavoidably uncertain transition.
She argues that we have not yet reached the tipping point where we have built the capabilities and the transition finance infrastructure that will support the right strategic decisions in an uncertain transition. Governments, central banks, and regulators all have their role to play. Meanwhile business and finance can make progress whilst policy is developing, ahead of clarity on sectoral paths and regulatory practice. Difficult conversations that follow are a sign of success on the pathway to net zero, not a sign of failure. Waiting for certainty and perfect information creates and excuse to go slowly – but this is a collective action problem where managing uncertainty is key.
Transforming the insurance Industry in Africa through ESG (MSN)
Insurance regulators and operators in Kenya have been urged to adopt ESG agendas to drive sustainable growth in the market. The substance of the Nairobi Declaration on Sustainable Insurance was a commitment by African insurance industry leaders to support the UN Sustainable Development Goals (SDGs).
The importance of ESG in the insurance is particularly relevant in Africa where there are unique challenges related to climate change, social inequality and governance issues. Africa is particularly vulnerable to climate change and insurers need to consider climate risks and promote sustainability by offering products that incentivise environment-friendly practices and investments. Furthermore, high levels of poverty and inequality in Africa increases impetus for insurers to promote social inclusivity and operate with probity and transparency.
Insurers can incorporate climate factors into their underwriting as well as develop products that promote sustainable agriculture and renewable energy as well as support positive social programmes. Incorporating ESG consideration into operations can attract socially conscious investors, drive differentiation from competitors and impact financial performance and long-term viability.
How should we regulate ESG research? (Financial Times – Subscription required)
As more investors incorporate ESG factors into asset selection, the firms tasked with giving an ESG rating to a security have come to wield great influence. Whilst there are many political critiques of ESG and ratings, there are complaints beyond this. Namely that ESG ratings are expensive, subjective, inconsistent, and flaky. Ratings also vary enormously between providers which creates confusion and invites the charge of accreditation being arbitrary.
Watchdogs can treat ESG ratings as akin either to broker research reports or to credit rating agencies. A broker-research model treats ratings as akin to opinions. In this case, concerns about conflicts of interest would need to be addressed by financial regulators. Treating ESG arbiters as like credit rating agencies (CRAs) would see imposition of strict requirements to ensure ratings are reliable and credible. This could include standards for data collection, materiality, methodology and objectives.
The credit ratings model may ultimately be more suitable for legitimising ratings. It is not perfect, though, but may point in a direction of common principles while allowing some diversity of opinion.
Insurance climate risk event launched in London: Senior executives explore climate risk and sustainability in Europe (Pressat)
One of the (re)insurance industry’s first conferences to specifically cover climate risk and sustainability, as these relate to the risk transfer industry globally, will take place in London this June. More than 150 senior executives responsible for influencing their companies’ climate and sustainability strategies will hear from more than 20 senior executives and experts in their field.
The event will explore how the industry can better understand the metrics increasingly used to measure ESG, and how wider strategies relating to climate change and net zero transition can be successfully developed and explained to stakeholders. Speakers will also focus on the many commercial opportunities climate change presents the industry.
An integrated approach to climate change involves not only insurance, which supports restoration of a site after an event, but also prevention measures that can reduce the impact and severity of an event, says Garth Marshall, Head of Climate Change and Sustainability at Zurich. The event takes place on June 7th at American Square Conference Centre.
EU Regulators Propose Changes to Sustainable Finance Disclosure Rules (ESG Today)
The European Supervisory Authorities (ESAs), Europe’s three primary financial regulation agencies, announced on Wednesday a series of proposed amendments aimed at extending and simplifying the EU’s Sustainable Finance Disclosure Regulation (SFDR).
The EU SFDR aims to establish harmonised rules for financial market participants including investors and advisers on transparency regarding the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes. It is also concerned with the provision of sustainability-related information with respect to financial products. Uncertainty, however, remains around some of the key reporting details.
In order to address some of the rules’ complexity, the ESAs have proposed consulting stakeholders on changes to the layout, structure and language of the regulation’s template. It has also developed a dashboard of key information for pre-contractual and periodic disclosure, such as whether the investment product has a sustainable investment objective or promotes sustainability characteristics. Additional proposals include greenhouse gas target disclosures including the level of ambition and how the target will be achieved among other technical revision to improve and simplify disclosure requirements.
A consultation has been launched into the proposed rules which is open until July 4, 2023.
ISSB Gives Companies an Extra Year on General Sustainability Reporting to Allow Focus on Climate Disclosure (ESG Today)
Companies reporting under the new climate disclosure standards being developed by the International Sustainability Standards Board (ISSB) of the IFRS Foundation will be given an additional year to provide disclosure on some sustainability-related risks, to enable them to first focus on climate-related reporting.
The ISSB was launched at the COP26 climate conference with a goal to establish a global baseline of disclosure requirements that can be used by jurisdictions on a standalone basis or incorporated into broader reporting frameworks. The board released exposure drafts for its first two reporting standards, covering general requirements for sustainability-related financial information and climate-related disclosures.
Under reliefs now in place, companies using the new standards will be required to report on climate-related risks and opportunities in the first year of reporting. However they will have an extra year to provide disclosure on other sustainability-related risks, disclose Scope 3 emissions or use the Green House Gas protocol to measure emissions to name a few areas. Companies now have the chance to phase in their approach to these areas.
Zurich Provides Suppliers With Tools to Measure, Address Carbon Footprint (ESG Today)
Zurich Insurance Group announced a new initiative aimed at decarbonising its supply chain, by providing suppliers with tools and resources to help measure and address their own carbon emissions.
The new initiative follows Zurich’s announcement last year of a goal for suppliers responsible for 75% of its roughly $2 billion of procurement spend to have science-based emissions reduction targets by 2025 and net-zero targets by 2030.
Zurich will provide suppliers with climate training materials, and it has teamed up with carbon accounting firm Normative to offer free access to its Business Carbon Calculator, which is optimised for SMEs.
Zurich has pledged to achieve net zero in its investment portfolio by 2050 and plans to reduce the carbon intensity of its listed equity and bond investments by 25% by 2025 and 30% for direct real estate investments. It also, in 2021, announced measures to significantly cut air travel and eliminate internal combustion vehicles from its fleet.
Continued action on sustainability
CSAA releases annual ESG report (Insurance Business America Magazine)
CSAA Insurance Group has announced the release of its annual ESG report in which the insurer details the progress made toward its goal of a 50% reduction in carbon emissions and carbon neutrality by 2025.
CSAA has already achieved a 45% reduction in emissions from its 2016 baseline, inclusive of scope 1, 2 and 3. CEO Tom Troy says it is incumbent on the industry to work to reduce the effects of climate change as extreme weather events increase in frequency, and that CSAA strive to be a leader in this important work. The report also highlighted the company’s progress in existing programs and announced several new initiatives, several which are focused on diversity and inclusion.
Arch continues commitment to decarbonisation (The Royal Gazette)
Arch Capital Group Ltd. has released its 2022 sustainability reports covering ESG strategy and integration into operations.
Arch’s corporate sustainability road map outlines a focus on growing speciality product lines while integrating ESG considerations into underwriting and investment decisions. They announced a goal in early 2022 to reduce scope 1 and scope 2 greenhouse gas emissions by 42 per cent and achieve net-zero operations by 2030.
Arch is a member of the S&P500 Index and provides insurance, reinsurance, and mortgage insurance on a worldwide basis through its wholly owned subsidiaries.
Pension Insurance Corporation sets out climate-related disclosures (Investment & Pensions Europe)
The pension Insurance Corporation (PIC), a specialist insurer of defined benefit (DB) pension schemes has set out its climate-related disclosures as it publish its second Task Force on Climate-related Financial Disclosures (TCFD) guidelines report this morning.
The report builds on PIC’s commitment to be carbon neutral across its own emissions by 2025 and across all sources of carbon emissions by 2050. PIC is committed to decreasing its investment carbon intensity by 50% by 2030 from a 2019 baseline and that 70% of the Corporation’s public corporate credit portfolio, where data is available, is aligned to a trajectory of 2°C, or below.
Simon Abel, chief strategy officer at PIC, said PIC invests for the long-term in assets that also deliver social value and particularly in projects the UK desperately needs.
Warning signs, rising risks and threats to ESG action
Rising ESG risks and the role of D&O cover (Investment Week)
LSE research in 2022 found the number of climate change-related litigation cases has more than doubled since 2015. There were some 800 cases filed throughout the period between 1986 and 2014, while more than 1,200 cases were filed in the last eight years alone. The UK has tightened up its requirements around disclosure requirements following amendments to the Companies Act 2006. Firms with either £36m annual turnover, £18m balance sheet total, or 250 employees are impacted by the Streamlined Energy and Carbon Reporting which requires disclosure on carbon and energy use.
Bruce Hepburn, CEO and founder and Mactavish, recommends that businesses review their Directors’ and Officers’ (D&O) insurance cover by evaluating policy wordings and exclusions to ensure it is fit for purpose. D&O provides protection and liability coverage for directors. Hepburn argues that the heightening legal risk environment and likely increase in D&O insurance rates means businesses reviewing their cover is vital.
Half of APAC insurers not yet started on net-zero (Insurance Business Asia Magazine)
A recent insurance landscape report for the Asia Pacific (APAC) region found that half of Asian insurers surveyed have not yet started on net-zero integration. Additionally, three in ten insurers have said that they have not yet integrated ESG strategies at all. This is despite an expectation that local ESG regulations will become stricter in the next three years amongst 62% of APAC insurers.
The report, from asset manager abrdn and strategy consultancy Quinlan & Associates, surveyed 56 senior executives across 43 insurance companies in eight APAC markets. Senior insurance solutions director at abrdn, Xiong Jian, said that the asset manager sees regulatory adoption and ESG integration as high priority focus areas for insurers in the region amid current market conditions. He argues that the key to gaining competitive advantage is to move away from a reactive, compliance-driven mindset to a proactive one: to see regulatory changes as opportunities to leverage for competitive advantage.
Key climate alliance for insurers reiterates members will comply with antitrust laws (Reuters)
The UN-convened Net-Zero Insurance Alliance has reiterated that members will comply with antitrust laws, following the decision of Munich Re and Zurich Insurance to exit the group in recent weeks.
Munich Re, the world’s largest reinsurer, said it was leaving to avoid antitrust risks while Zurich which followed suit declined to comment on antitrust saying its decision to withdraw was not linked to Munich Re.
Almost six in 10 say ESG is critical – Aon (Insurance Business Asia Magazine)
Results from the latest Aon survey found that only 58% of companies in the Asia-Pacific region see ESG issues as critical to their firms in terms of long-term success. A lower percentage of 29% also said they have ESG-related goals and KPIs for their C-suite.
The report also found that only three in ten companies surveyed have a dedicated ESG function. Board education also came up as a key area for further integrating ESG into the market, with more than half of respondents saying their entire board is involved in ESG-related decisions but less than half of these having a formal process of training on ESG issues. Linking financial incentives of executive plans to ESG performance may also help alignment with company strategy.
Failing to address and integrate ESG metrics can expose a company to reputational risk, financial impacts and regulatory consequences according to Aon Asia corporate governance and ESG lead Boon Chong Na. He also argues companies will need to embark on job redesign and upskilling initiatives to hire the right people and meet the growing demand for ESG delivery.
Activists ramp up pressure over green underwriting (Insurance Day – Subscription required)
While the insurance industry has taken steps in terms of using underwriting to promote environmentally solid practices among their clients, especially the coal sector, it needs to do more to influence carbon-intensive industries to improve say activists.
Campaigners have identified underwriting as a powerful tool in the fight against climate change. The insurance industry should expect more protests in the coming months as activists ramp up their efforts to change insurers’ behaviour.
Hannover Re the latest to leave Net-Zero Insurance Alliance (Reinsurance News)
German reinsurance giant Hannover Re has opted to leave the NZIA, making it the third high profile re/insurer after Munich Re and Zurich to leave the UN-convened alliance in less than a month. Hannover Re says it is committed to its sustainability strategy and aims to achieve full climate neutrality by 2050 at the latest.
While Hannover Re has not provided a detailed reason for leaving the NZIA, Munich Re cited antitrust risks and Zurich noted a desire to focus its resources to support its customers with their transition. This notable move may see others follow suit in the coming days and weeks ahead.
