May 18, 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: Managing ESG across geographies
Read our summary and analysis below.
In certain states in the USA, there is now a push to regulate against insurers taking ESG concerns into insurance decision making and pricing. We have seen, for example, how Texas Senate Bill 833 would ban from the state any insurance companies that use ESG in setting prices or deciding whether to offer coverage.
This stands in sharp contrast to the UK and Europe where there is a push from (quasi-/)regulators to embed ESG into underwriting decision making. For example, in the latest Lloyd’s guidance, the minimum expectation for 2022 was that managing agents “consider what sustainability and ESG factors they want to include as part of underwriting decisions. These factors should be incorporated into managing agent’s ESG strategy and approach documents”.
What can or should insurers in both locations do, when facing what appears to be contradictory guidance or regulation?
You could try the wait-and-see approach and/or rely on the fact that this apparent contradiction may not manifest – whether because the legislation will not pass (or survive after it has passed) in the US, or because the softer language in the UK and Europe doesn’t and likely will not require a link to pricing.
However, that is not a viable long-term position given the regulatory trends differ so markedly between those individual states in the US and the UK/Europe.
The alternative – not one that is particularly attractive – is to prepare in advance, recognise the differences, and start thinking through how to navigate these potentially contradictory requirements e.g. through different policies in different jurisdictions.
Which approach will you take?
In the fifth edition of GILC’s annual ‘Risk Radar Report’ Chair Gillian Davidson highlighted the increasing importance of ESG considerations for insurers and the wider business community. The consensus among member firms of Global Insurance Law Connect suggested that the insurance industry is acknowledging the potential benefits of embracing appropriate ESG policies, such as significant growth opportunities, long-term value creation, and enhanced risk management.
However, whilst progress has been made Davidson says more efforts are needed. Underwriting business for frequent and severe natural catastrophe events has become increasingly challenging in many regions worldwide. Against a backdrop of geopolitical risks, supply chain disruptions, and inflationary pressures, organisations are grappling with striking the right balance between ESG investments and managing rising costs.
Global (re)insurance group Chaucer has signed up to the UN Principles for Sustainable Insurance (PSI), which provides a global framework for the industry to address ESG risks and opportunities. The PSI was developed through a partnership between risk management leaders and the United Nations Environment Programme Finance Initiative. The principles are: embedding ESG issues relevant to the insurance business into decision-making; and working together with clients and business partners to raise awareness of ESG issues, manage risk, and develop solutions.
The latest ESG initiative follows recent innovations by Chaucer such as its ESG Balanced Scorecard programme that was developed jointly with Moody’s, the leading global provider of financial intelligence. Chaucer has also invested in and is providing lead capacity for carbon credit insurance specialist Kita, whose Carbon Purchase Protection Cover insures buyers of forward-purchased carbon credits.
At a business breakfast last week, FSD Africa and the Financial Sector Conduct Authority issued a call to action to commit to the Nairobi Declaration on Sustainable Insurance as a first step toward creating a sustainable insurance industry and building resilience for the continent.
Formally launched in April 2021, the Nairobi Declaration on Sustainable Insurance (NDSI) is a declaration of commitment by African insurance industry leaders to support the achievement of the UN Sustainable Development Goals (SDGs).
With backing from more than 10 inaugural signatories, the declaration brings together senior leaders to accelerate solutions to a set of major sustainability challenges — ranging from climate change and ecosystem degradation to poverty and social inequality — that have assumed even greater urgency in a post-Covid-19 world. Currently, 102 organisations across the continent have signed up to the declaration.
Manulife has unveiled its 2022 Environmental, Social, and Governance (ESG) Report, along with its 2022 Public Accountability Statement. These reports provide insights into Manulife’s sustainability efforts. Within the realm of environmental sustainability, company-wide green investments stood at $68.6 billion.
Manulife Investment Management has planted over 1.3 billion trees since 1985, according to the report. Their eco-conscious initiatives extend to their operations, with 100% of Manulife Bank ATMs in Canada are now powered by green energy. Additionally, 98% of Manulife Investment Management-managed farms employ regenerative practices, while the US agriculture platform is certified to the respected sustainability standard of Leading Harvest, Manulife said.
The company has also made progress on inclusion, with 37% female representation at the assistant vice president level, 27% of independent directors self-identifying as members of a visible minority and 64% representing female directors.
RenaissanceRe, the Bermuda headquartered reinsurance firm with a significant third-party ILS capital management unit, is partnering with Moody’s Analytics to benchmark the environmental impact of risks within its treaty reinsurance portfolios. The partnership, between RenRe and Moody’s, is the first time Moody’s sustainability capabilities are being applied to a reinsurer’s treaty books.
By benchmarking the environmental impact of risks within RenRe’s underwriting portfolio, the technology will provide a transparent benchmarking approach across counterparties and diverse risk classes, the companies said.
Cathal Carr, SVP, Chief Underwriting Officer – Europe, and Global Head of Climate & Sustainability Underwriting Strategy at RenaissanceRe, commented, “As managers of complex risks, the reinsurance industry is uniquely positioned to protect communities and businesses against the impact of a changing climate.
The significant developments in the last year mean that climate reporting will soon become mandatory in many jurisdictions. In the European Union, the requirements will take the shape of the European Sustainability Reporting Standards (ESRS). In the US, the Securities and Exchange Commission’s (SEC) proposed Climate Change Disclosures will form the requirements. In the UK, the first wave of companies has started to report under the Task Force on Climate-Related Financial Disclosures (TCFD) framework, which will also eventually become mandatory in other jurisdictions.
According to a Moody’s analytics report of one-to-one interviews and a survey of 30 insurers from around the world many large insurers have begun climate reporting in the last few years. Insurers also plan to use, or are already developing, multiple scenarios which often require customisation and consideration for changes such as portfolio mix over time. However Insurers are currently unable to completely assess emissions from their investments, in particular from alternative assets. While this part of the balance sheet remains a challenge, P&C insurers are starting to turn their attention to underwriting emissions from their insurance contracts.
Analysis of more than 18,000 investment funds across Europe has found that less than 4% would be able to comply with naming laws for ESG funds across key markets. The research, from technology platform Clarity AI, found that many would have to rename their ESG funds if they wanted to sell across the UK, US and Europe, all of which have different definitions and naming laws for non-financial disclosures and sustainability funds.
Lack of data is hindering private equity investors from making informed decisions based on ESG risks. To help investors gain a clearer understanding of these risks in their portfolio and future acquisition targets, AXA Climate has introduced a new functionality on its platform for asset managers.
The update allows users to obtain a consolidated view of ESG exposures at both the fund and portfolio level, helping them meet key reporting requirements from regulators and institutional investors. AXA Climate’s platform, called Altitude, contains algorithm and scientific databases that can identify all risks related to climate change, carbon emissions and biodiversity loss for businesses. It has grown to a database of more than 750 companies. Leading asset management organizations such as Naxicap Partners and RAISE have also adopted the platform.
AXA Climate is striving to not just make quality data available, but also understandable and actionable for investors.
Texas Senate Bill 833 would ban from the state any insurance companies that use ESG in setting prices or deciding whether to offer coverage. In Texas the oil and gas industry paid nearly $25 billion in state and local taxes and state royalties in 2022. While the bill is still in committee, it is part of a wider move by conservative state legislators and attorneys general against ESG efforts.
On Wednesday, for example, Indiana joined 16 other states in seeking to restrict the use of ESG across the country. The 17 state attorneys general demanded that the Federal Energy Regulatory Commission (FERC) prohibit asset manager BlackRock from applying ESG criteria to the energy companies it invests in.
Those that disagree with the approach include Illinois State Treasurer Michael Frerichs who told a committee that attacks on ESG may cost taxpayers and pensioners millions, and in some cases billions of dollars as it may prevent companies from adequately assessing investment or insurance risk.
Texas Republicans vowing to protect their home state oil and gas industry have expanded their fight against ESG policies from financial firms to insurance companies.
Legislative proposals advancing in the final weeks of the session would limit how the businesses use ESG factors that consider issues such as climate change in their operations. One measure would restrict ESG considerations when insurers set rates. Another would prevent Texas-based insurers from implementing shareholder proposals that limit work with fossil fuel companies or other industries for environmental, social, or political goals.
The focus on insurance follows the state’s 2021 law to punish financial companies deemed to be boycotting fossil fuels—a model Republican legislators across the country are copying. Texas lawmakers said they’re now targeting activist investors who seek to limit the oil and gas industry’s access to insurance.
Axa Investment Managers has named Marie Luchet as head of ESG and Sustainability at Axa IM Prime, the firm’s private markets fund-of-funds business.
Luchet will be responsible for overseeing Axa IM Prime’s sustainability strategy, including the advancement of ESG integration in investment decision making, fund and asset-manager selection, and reporting and product design.
Prior to joining Axa, Luchet led ESG strategy for risk and compliance consultancy ACA Group, having also worked at the Principles for Responsible Investment (UN PRI) between 2016 and 2022. Luchet also served as head of responsible investment with ECOFI Investissements from 2010 to 2016, and as an ESG sell-side analyst with CIC Market Solutions from 2006 to 2008.
International specialty re/insurance group Chaucer has announced the appointment of Simon Tighe to group head of ESG in addition to his current role as group head of investments and treasury.
Tighe has been instrumental in driving Chaucer’s ESG sustainability strategy, the company said.
He played a key role in the creation of the ESG Balanced Scorecard, Chaucer’s major ESG initiative, which was developed in partnership with Moody’s. The scorecard allows businesses to measure their ESG performance across up to 158 metrics.
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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