November 22, 2022
ESG Movement Begins to Impact Insurers
In October, Munich Reinsurance Co., the world’s largest reinsurer, announced new stricter policies for investing in and underwriting oil and gas projects, drawing praise from environmental activists.
Munich RE has said on its website that as of April 2023 it would not invest or insure projects involving new oil and gas fields or new midstream oil infrastructure.
As part of its Insure Our Future campaign, Munich Re said its move to restrict what it would underwrite based on concern for the climate was “a significant step and a clear signal to the global insurance market.”
Over the past few years insurers have increasingly been tightening their underwriting and restricting their investment policies to exclude polluting industries, though often falling short of activists’ demands. But excluding certain industries from their underwriting or investment portfolios is only a part of a wider and more aggressive campaign to change corporate decision-making and transform it based on a new set of ethical guidelines.
Environmental, Social and Governance (ESG)
It’s not only activists who are forcing insurance companies to align their underwriting and investment policies to ideals that overrule decisions based purely on financial returns on investment.
According to consulting firm PwC (formerly Price Waterhouse and Coopers & Lybrand), regulatory developments are forcing insurers to reorient their goals and objectives with environmental, social and governance (ESG) needs in mind.
The climate disclosure requirements of the US Securities and Exchange Commission (SEC), which it released as a proposal in March, is intended to address growing investor demands to understand what companies are doing to manage climate change risks and the transition to a low carbon economy.
Although insurers are awaiting more specific guidance from the SEC on some proposal topics, they’re facing a move from existing voluntary disclosures of climate-related risks to mandatory requirements that potentially carry increased legal liability.
In addition, the National Association of Insurance Commissioners (NAIC) released an updated climate risk disclosure survey in April. Survey questions align almost entirely with the Task Force on Climate-Related Financial Disclosures (TCFD) framework. This will result in a significant shift towards TCFD-aligned disclosures for US insurers, forcing carriers to think about climate change in multiple facets of their business and confront how they address it.
Insurers Need a Focused ESG Strategy, says Consultant
As a result, a formal and clearly defined ESG strategy is no longer optional, according to PwC. Not only do key stakeholders want explanations of how insurers are addressing the issue, says PwC, according to its survey of leading global insurers, they’re also formally mandating them.
- 25% of global insurers told us that “understanding ESG-related regulations and guidelines” is the main challenge in pushing forward their ESG agenda, followed by “understanding how best to take action on ESG” (17%) and “matching ESG initiatives with customer needs” (15%).
- 49% of insurance CEOs say their company does not have the ability to measure their greenhouse gas (GHG) emissions today, despite the SEC’s proposal for new climate disclosure requirements. 85% of global insurers believe ESG will impact all functions of their business. They identified investments as the single largest area of impact (91% respondents), followed by risk and internal audit (90%) and underwriting (88%).
- Global insurers tell us that the main driver of their ESG pursuit is “to minimize the impact from climate change” (26%), “to gain a better reputation as a firm” (11%) and “to minimize risk” (11%).
However, PwC says that of the “three pillars of ESG,” as it defines them, only 35% of global insurers are “significantly focused” on all three of them. Yes, there are three and environment is only one:
Environment pillar: climate
- Mitigate climate change risks (62%).
- Meet customer expectations (61%).
- Drive product/service innovation (54%).
- Satisfy investor demands (51%).
Social pillar: building trust
- 69% of global insurance CEOs tell us they are extremely or very concerned with the impact of social inequality on their ability to attract and retain key skills.
- 49% of global insurance CEOs tell us they are extremely or very concerned with the impact of social inequality on their ability to sell products and services.
- Increasing shareholder value is among the top priorities in all regions, while creating a fairer society is a primary driver exclusively in Europe.
Governance pillar: incentives
ESG calls for responsible organizational actions and behaviors, including transparency, and well-understood and clearly communicated business ethics, as well as the recognition that diverse viewpoints lead to more informed decisions. PwC says carriers still have far to go in this area.
Less than half of FTSE 100 companies have tied executive pay to ESG measures and progress has been even slower further down the chain of command. This represents a prime opportunity for carriers to embed ESG objectives into the entire organization and increase employee commitment to the according to PwC.