12 January: What’s going on in ESG and Insurance?
January 12, 2023
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The week’s topic: ESG in 2023.
Read our summary and analysis below.
Analysis
Few topics have risen up the agenda of Boards across the insurance industry this year quite like ESG. Our view is that the gap between the front and the back of the pack will grow substantially in 2023.
Those at the back of the pack will continue to focus on business-as-usual activities and the absolute minimum they have to do.
On the other hand, we see 6 key activities of (re)insurers (aside from regulation) for those who are developing their ESG approach in the coming year:
- Delivering specific ESG training, education and comms
- Acquiring and using ESG-specific data and metrics
- Building an approach for incorporating ESG into underwriting decisions
- Developing an approach for net-zero
- Going beyond “E” and thinking about social impact
- Identifying new ESG products and opportunities
As a result, we will see a widening of the gap between those doing the minimum and those making progress against many or all of these categories. This will lead to a serious challenge for the (re)insurance industry: what should we do with those who have been left behind and what are the ramifications of this for the global transition?
More collaboration, greater incentives for action and perhaps even regulation may form part of the answer. The worry is that this still might not be enough.
Read our piece covering reflections on 2022 and greater detail on the 6 activities mentioned above, in the ESG Insurer HERE.
Summary
Action from insurers
Apex, Mosaic and Aon combine on D&O ESG coverage (Insurance Business)
Global financial services provider Apex Group has announced the launch of Apex Protect in partnership with Mosaic Insurance and Aon. Apex Protect offers enhanced D&O coverage for funds. The coverage factors environmental, social and governance credentials into the insurance risk assessment and improving ESG scores will deliver premium benefits.
Zurich & ICS launch Envision Re as sustainability-focused group captive (Reinsurance News)
Zurich North America has teamed up with Innovative Captive Strategies (ICS) to create Envision Re which aims to serve businesses that are looking to optimise their risk management programs while reducing their carbon footprint.
NN tightens investment policies on unconventional oil and gas to reach new targets (ESG Insurer – subscription required)
Dutch insurer NN Group has unveiled a climate action plan with the aim to reduce greenhouse gas emissions to net-zero in its own operations by 2040, and in its investments and underwriting by 2050.
Market challenges/movements
Companies double use of environmental, DEI metrics in exec incentive comp in 2022: WTW survey (ESG Today)
According to Willis Towers Watson, large public companies significantly ramped the integration of ESG metrics in executive incentive compensation plans in 2022.
77% of companies surveyed used at least one ESG metric in their incentive plans, up from 68% in 2021. ESG metrics are most commonly used in short-term incentive (STI) plans, with 75% of companies using at least one metric for these plans (vs 66% last year), while ESG integration into long-term incentive (LTI) plans is growing rapidly, reaching 21% in 2022, compared to only 13% the prior year.
Diversity, Equity and Inclusion (DEI) saw the most significant increases over the past year, with 40% of companies now including at least one environmental metric in executive compensation plans in 2022, up from 22% in 2021.
Global Risk Report 2023: Biodiversity loss and ecosystem collapse one of fastest deteriorating global risks over the next decade (World Economic Forum)
The Global Risks Report 2023 explores some of the most severe risks of the next decade. “Cost-of-living crisis” is ranked as the most severe short-term global risk over the next two years, peaking in the short-term. “Biodiversity loss and ecosystem collapse” is viewed as the fastest deteriorating global risk over the next decade. Notably, all six environmental risks feature in the top 10 risks over the next 10 years.
The report shows that the next decade will be characterised by environmental and societal crises, driven by underlying geopolitical and economic trends. Climate and environmental risks are the core focus of global risks perceptions over the next decade – and are the risks for which we are seen to be the least prepared.
ESG issues to increase credit risk in 2023: Moody’s (ESG Today)
The 2023 ESG Outlook report identified four key ESG-related trends that Moody’s expects will impact credit this year. This includes:
- Growing scrutiny of corporate decarbonisation plans
- Elevated social risks driven by high cost-of-living concerns
- Greater refinancing risk for lower-rated issuers with governance challenges
- An increasingly complex ESG regulatory and political landscape
Contributing factors include greater scrutiny of climate-related plans and growing regulatory & political pressures, exacerbated by the economic and geopolitical issues stemming from the Russia-Ukraine conflict & ongoing pandemic fallout.
Insurers share their views on the integration of sustainability risks in Solvency II (Insurance Europe)
Although requirements for insurers to integrate sustainability risks into their investment, underwriting and reserving are already a part of Solvency II, European insurers have acknowledged the benefit of adding some further clarifications.
Therefore, the industry has expressed its support for the Commission’s sustainability related proposals that are risk-based. These include:
- Regular reviews, and updates where necessary, of the scope and calibration of standard formula parameters pertaining to climate-related natural catastrophe risk
- The inclusion of climate change scenario analysis in the ORSA
- EIOPA’s mandate to investigate whether a differential prudential treatment for green/brown assets, as well as assets with a social objective, is justified based on evidence of risk differentials
Regulation
FCA reveals ESG committee line-up (Insurance Age – subscription required)
The Financial Conduct Authority has established an ESG advisory committee to help the regulator execute its ESG-related responsibilities. The watchdog’s responsibilities include meeting the government’s expectation that when considering how to advance and achieve objectives and functions it has regard to the UK’s commitment to achieving a net-zero economy by 2050. The committee will provide guidance to the board on relevant emerging ESG topics or issues and views on how the FCA should develop its ESG strategy in keeping with statutory objectives and regulatory.
Fund managers frustrated over confusing ESG regulations (Insurance Journal)
Fund managers have expressed frustration following a “confusing rollout” of ESG regulatory framework. Since the EU’s Sustainable Finance Disclosure Regulation was enforced last year, the EU Commission has clarified its guidance around Article 9. Only funds containing 100% sustainable assets, save for hedging and liquidity, can use the designation. Consequently, many funds previously registered under Article 9 have been relegated to Article 8, despite having sustainable thresholds of 80-90%. BlackRock, Amundi SA, AXA and Allianz were all affected by reclassifications.
SEC climate disclosure rules slated for April release (Environmental Finance – subscription required)
The U.S. Securities and Exchange Commission’s climate disclosure rules are slated for release in April 2023. They will:
- Improve the quality of climate disclosures for firms under SEC supervision
- Align broadly with guidance of the TCFD and ISSB
- Help stakeholders better assess the climate risks and opportunities confronting different firms
About the author
Miqdaad Versi is a Partner and Head of Sustainability at Oxbow Partners. He leads engagements on sustainability strategy and delivery for some of the world’s largest (re)insurers. He has a wide network spanning the executive and sustainability leaders teams of large (re)insurers, industry bodies, and other organisations such as the United Nations Environmental Programme and the Insurance Development Forum.
