Industry Issues | ERM & Emerging Risks

Attention to Insurers' Environmental, Social, and Governance Practices Increasing

Emerging Risk - Climate Change and ESG

Best's Special Report: Wide-Ranging Stakeholders Demand Greater Insurer and Reinsurer Focus on ESG Principles

Insurers and reinsurers are increasingly focusing on incorporating environmental, social, and governance (ESG) practices into their investment and underwriting decision-making process, according to a new special report by AM Best. Over the last few years, investors have made judgments based on a broad range of criteria, as opposed to solely examining financial metrics. These stakeholders aim to improve their understanding of how companies consider and manage emerging risks.

Consumers are also demanding that businesses take positions on societal issues and are more willing to engage with those companies that share their values, says Best. Furthermore, regulatory authorities, particularly in Europe, and non-government organisations are compelling insurers and reinsurers to demonstrate greater transparency, and disclose how they adapt and consider ESG risks and opportunities in their operations.

AM Best expects (re)insurers that decide to ignore stakeholder pressures related to ESG factors also must consider the potentially adverse effects of elevated reputational risk. AM Best notes that the industry's focus on ESG is likely to remain an area of interest for the foreseeable future, with more regulators introducing ESG-related disclosure requirements.

On December 20, 2018, A.M. Best included a section with Best's Credit Rating Methodology (BCRM) making explicit reference to the role that ESG factors play within the credit rating assessment process. The additional reference was to provide clarification on existing rating criteria and was not an indication of a change in methodology.

Fitch Ratings: Introducing ESG Relevance Scores for Financial Institutions 

Nearly 20% of global financial institution ratings are currently influenced by governance risk according to a Fitch analysis of new Environmental, Social & Governance (ESG) Relevance Scores. ESG risks overall have a low level of direct impact on financial institution credit ratings. The scores cover over 900 banks, non-bank financial institutions and insurance companies around the globe. 

For insurance companies, Fitch has assigned ESG Relevance Scores across its internationally-rated portfolio. Review all of the scores here: ESG Relevance Scores for Insurance Companies

Fitch Webinar: ESG Relevance Scores for Financial Institutions
Thursday 7 March | 10am EST | 3pm GMT
Join Fitch analysts from Insurance, Banks and NBFI, for a webinar providing a detailed overview of our approach to ESG, its analytical framework, and the deliverables that are available to market participants. Register HERE.

S&P Global Ratings incorporates ESG sections in rating reports
S&P Global Ratings has started including environmental, social, and governance sections within its issuer credit rating reports on corporate entities. The incorporation of ESG sections in rating reports has started with two sectors: oil and gas, and utilities. S&P Global Ratings expects to incorporate ESG sections in approximately 2,000 credits through the course of the year.

Wall Street Journal: Shareholders calling for more disclosure of corporate climate risks (subscription required)

Shareholders are expected during upcoming annual meetings to introduce 75 or more proposals on the disclosure of companies' climate risks, according to ISS Analytics. That number would be a record high and a sharp increase from the 17 such proposals that emerged in 2013. Investing powerhouses such as Blackrock, Inc. and Vanguard Group are separately backing voluntary climate-change reporting standards for public companies and hope to prompt an uptick in disclosures this spring, according to the WSJ.

Some investors, Democratic politicians and environmental groups are pushing for mandatory disclosures. But the Securities and Exchange Commission so far hasn't required specific climate-related disclosures, instead telling companies to hew to broader criteria for what public companies must disclose as a material risk, concluded the WSJ.

Mayer Brown: ESG Teleconference (Replay) - Part I: Discussion of the current US Securities and Exchange Commission disclosure requirements; steps shareholders are taking that affect disclosures; a sampling of alternative climate change reporting frameworks; the current administration and change (both political and climate); and, the potential effect on US public companies. Part II: How the Sustainable Development Goals and Paris Agreement are shaping the international ESG space; what ESG is in an EU context and how the EU is driving sustainable finance; what's in the European Commission's legislative proposal for ESG reporting and what's the impact of this for the insurance sector; how the UK's emissions disclosure regime is evolving; and, how the Task Force on Climate-related Financial Disclosures (TCFD) is impacting disclosure.

US Public Company Climate Change Disclosures: Where Do We Stand? 

Environmental, Social and Governance Reporting: International Developments

UNEP: Mandatory climate change disclosures "are only a question of time"

International regulators' are encouraging climate risk disclosures that may make such disclosures mandatory, according to Geoff Summerhayes, chair of the UNEP Sustainable Insurance Forum (SIF). 

"Financial regulators in most jurisdictions are not yet at the point of mandating climate risk disclosures," said Summerhayes. However, Summerhayes continued, regulators are asking more pointed questions to deepen their understanding of how prepared and resilient regulated entities are.

Reported examples of regulator questions included: 

  •  Has your organisation incorporated physical or transitional-related climate change factors into the pricing of insurance products?
  •  Does your organisation expect transitional risk will affect the valuation of assets in your investment portfolios?
  • Is your organisation assessing the potential for climate change to have impacts on capital adequacy or solvency?

ClimateWise, an industry group convened by the University of Cambridge Institute for Sustainability Leadership launched a framework for assessing physical climate risk. The framework, based on natural catastrophe models, is designed for investors and lenders to understand and quantify physical risks, particularly from extreme weather, and how these risks impact real estate and infrastructure assets under future climate scenarios.
Physical risk framework: Understanding the impact of climate change on real estate lending and investment portfolios

It follows a transitional risk framework launched to help investors and regulators assess how the transition to a low-carbon economy will impact the financial performance of infrastructure investments.
Transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments

UNEP FI’s Principles for Sustainable Insurance - first ever guidance designed for the global insurance industry to integrate sustainability into industrial and commercial business.