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Keep me informedMarch 23, 2023 Miqdaad Versi
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The week’s topic: The continued development of ESG despite challenges in the US
Read our summary and analysis below.
In previous newsletters we have highlighted the toxicity of the term “ESG” in the US and the broader challenges facing those incorporating climate and other non-financial considerations in investment or underwriting decisions.
However, this is not stopping the Sustainability drive across the global insurance market. Just in the past two weeks, we see the drivers for action on ESG and sustainability continuing to develop in the same direction:
Given how the underlying drivers of action on ESG in insurance continue to move forward, it would be a brave decision to punt ESG action into the long grass.
The Bank of England recently published a report setting out its latest thinking on climate-related risks and regulatory capital frameworks. It includes updates on capability and regime gaps, capitalisation timelines and areas for future research and analysis.
As a short-term priority, the Bank is focused on ensuring firms make progress to address ‘capability gaps’ to improve their identification, measurement, and management of climate risks. Improving these areas will allow the reduction of the quantum of capital required in the future for resilience. The Bank also notes that the unique characteristics of climate risks mean that their capture by capital frameworks requires a more forward-looking approach than used for many other risks. According to current evidence, though, the existing horizons over which risks are capitalised by banks and insurers are appropriate. This means there is insufficient justification for regulators to change these time horizons.
Further work is needed to assess where there may be a regime gap in the macroprudential framework, where macroprudential regulation is that aimed at reducing systemic financial risk. Calibration of macroprudential tools would be challenging given uncertainties around climate risks and the need for them to help facilitate the transition to net-zero. The Bank also encourages greater public dialogue and research in this area.
Reflecting on the Bank of England’s climate report, Insurance Times highlight the way in which the Bank warns about “uncertainty” around whether insurers are adequately capitalised against the threat of climate risks. While a previous report into Climate Change Adaptation published in October 2021 by the Bank said current frameworks already captured the risks to some extent, this new report exposes difficulties in estimating risks and the need for proper controls.
The Bank said it would continue to develop its strategy and capabilities to use climate scenario exercises to understand firms’ exposures to climate risks and drive further improvements in risk management.
The FCA have completed a preliminary review on ESG benchmarks. This found that the overall quality of ESG-related disclosures made by benchmark administrators was poor. Issues identified include:
High quality ESG benchmarks are important to support trust in the market for ESG products and the transition to a net-zero economy.
In a new report Scottish Widows’ outline several policy and pension fund recommendations to convene industry action on this issue and enable nature-positive asset allocation throughout the financial services sector.
These include calling on the UK government and regulators to deliver transformative policy action that demonstrates leadership, supports mobilisation of nature-positive capital from the finance sector, and optimises cross-stakeholder collaboration.
Moreover, encouraging pension funds to consider the systemic risk of biodiversity loss and adopt the Taskforce on Nature-related Financial Disclosures framework, which will support better pension outcomes, risk management, and decision making.
Finally, advocating for regulation of the voluntary carbon markets in the UK, to drive the setting of high-quality standards, help address the nature financing gap, and support actions on decarbonisation and preservation of nature.
Larry Fink mounted a defence of BlackRock’s actions on the energy transition in his long-awaited annual letter published on Wednesday, but explicit mentions of ESG were absent.
The introduction, which heavily emphasises the theme of choice, dances around the topic of the ESG backlash in the US, but does not address it explicitly. “There are many people with opinions about how we should manage our clients’ money,” says Fink. “But the money doesn’t belong to these people. It’s not ours either. It belongs to our clients, and our responsibility and our duty is to them.
“We see opinions diverging across regions – including the US and Europe – and even within regions – especially in the US.” He notes that this creates challenges for the “truly global” BlackRock. However, he claims that the firm’s diverse offerings, global perspectives and client-centric approach remain “powerful competitive advantages”.
Environmental protest group Mother’s Rise Up have staged a Mother’s Day-themed protest outside Lloyd’s of London in a call for Lloyd’s to cease its alleged coverage of new fossil fuel projects in the North Sea.
Munich Re saw reductions in activities relating to coal-fired power plants and thermal coal extraction of 29 percent and 37 percent respectively in 2022. This was the company’s first year of quantifying environmental impacts in insurance business.
Ariel Re has sponsored a third catastrophe bond issued by Bermuda special purpose insurer Titania Re providing $125mn of collateralised reinsurance cover for named storms and earthquakes, adding a carbon offset feature for replacement of buildings and vehicles.
In the event that a significant hurricane or earthquake event requires a large number of homes, commercial properties and vehicles to be replaced, Ariel Re will look to purchase carbon offset options from qualified providers to generate carbon credits.
There is currently no rule in the cat bond market stipulating that replacements must have lower carbon emissions.
A recent survey of 30,000 people in 14 countries found that a majority (80%) of consumers want insurers to embed ESG initiatives into their proposition. Consumers are looking to insurance companies to act on the world’s biggest challenges such as climate change, ageing populations, and healthcare gaps. This shows that attitudes and behaviours around insurance are increasingly purpose-driven and prevention-focused.
However, although respondents expressed an overwhelming preference for risk prevention services in auto, home, life, and health insurance, few use the current offerings in the market. Only 4.3% in the US, and the 2.1% UK said they took up the services from their insurers.
Quality data and ESG factors are both now critical to underwriting performance. However, the use of third-party ESG data is early in its development partly because data providers are not yet meeting underwriters’ detailed needs.
According to a survey conducted by the London Market Association, a great majority use external ESG datasets to inform investment portfolios. However, the way this data is used varies widely from simply passive monitoring at one end of the spectrum to incorporation into complex formulae to limit ESG risk exposure.
When it came to underwriting, though, only 52% of respondents used ESG data in decision-making. Even then, the application of such data is still in its early stages or is used largely for information only. Further, the supply of data is from fragmented sources with no clear frontrunners which underwriters consistently find valuable. This suggests an immature state of supply and usage.
Another reason for this is that granular ESG data is not as available for investment assets than for insured businesses. It underlines that underwriting firms need to define the data they want from suppliers (and ultimately insureds) more clearly, and to understand better how they might use it.
There is an urgent need for deeper independent research to better determine the relationship between ESG scores and insurance risk. The LMA see the furtherance of this agenda as a key priority for the year.
The IDF have revealed in its annual report that the total risk capacity offered or expected through the Insurance Development Forum (IDF)’s Tripartite Agreement with the UNDP and the German government has reached $2.2bn.
The scheme, which is aiming to reach $5bn in offered capacity to 500 million vulnerable people by 2025, is expected to reach 44 percent of its capacity target based on projects currently in development. Having already launched insurance mechanisms in Peru, Ghana, Mexico, Colombia and Nigeria, the IDF have revealed details of five new projects. These include a scheme to provide cover in Argentina, an agriculture scheme in Colombia and a $100mn capacity project in Uzbekistan.
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About the author
Miqdaad Versi, Principal
Miqdaad is a Partner and Head of ESG at Oxbow Partners, with a particular focus is on ESG & Sustainability, and reinsurance. His past experience includes 4 years at Oliver Wyman Financial Services and 2 years in the Strategy team within Commercial Cards at the Royal Bank of Scotland. Miqdaad has a first class degree in Mathematics from the University of Oxford.
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