24 November: What’s going on in ESG and insurance?
November 24, 2022
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The highlight this month: Have we forgotten the S in ESG, and what did we learn from COP27?
Read our summary and analysis below.
Analysis
Have we forgotten the “S” in ESG?
The modern ESG movement started decades ago with socially responsible investing at its core, since, we have seen a shift to environmental impact and supporting governance. For insurers, this has meant a focus on the environmental impact of investments, and with the recent release of the PCAF Insurance Associated Emissions Standard, of Underwriting portfolios.
Significant progress (though imperfect) has been made by insurers on “E” and “G” fronts; “S” now seems to be making its way back into the conversation.
The Geneva Association have published a report exploring how insurers can extend their inherent social utility to better addresses the social dimension of ESG; Social responsibility was a hot topic through COP27 – with significant new agreements and financial mechanisms agreed; and The Insurance Information Institute and The World Bank Group have published a report discussing how the insurance industry can support governments and corporations progress towards SDGs.
A major challenge for insurers when addressing social issues is the development of a framework to measure social impact. However new disclosure requirements being adopted are starting to address this issue, for example the CSRD which has been adopted by the European has a much greater emphasis on social issues than its predecessor the NFDR.
There have been some important initiatives in this space:
- Geneva Association: Insurers can create additional social benefits by weaving considerations through their core insurance activities; for example, by promoting financial literacy and prioritising affordability to better serve lower- to middle-income populations.
- COP27: Extensive discussion around “who should pay” and progress made with development of the “Loss and Damage” fund to address climate damage in countries which are, broadly, not responsible for the impacts.
- Insurance Information Institute: This report considers the role of insurance in progressing SDGs from three angles: Impact of insurance through households, businesses, and the public sectors; Dimensions of economic growth, social inclusion, and environmental protection; and from the point of view of an insurance company, how insurers can support the SDGs through underwriting and risk transfer, as an investor and as a corporate citizen/employer.
“Social” expectations from the public, employees, activists, and investors are all rising. (Re)insurers must consider their position and prepare for an expanding set of regulatory requirements that will undoubtedly include social requirements. As we’ve seen on climate, insurers can choose to lead or to “keep pace”, but inaction is unlikely to be a tenable position for long.
Summary
Reporting regulation
EU lawmakers adopt Corporate Sustainability Reporting rules (ESG Today)
The European Parliament has adopted the Corporate Sustainability Reporting Directive (CSRD), slated to come into effect from 2024-2026. The CRSD is a major update to the 2014 Non-Financial Reporting Directive (NFRD), greatly expanding the number of companies required to provide sustainability disclosures to over 50k, from around 12k currently as well as introducing more detailed reporting requirements on impacts. Independent report auditing will also become compulsory. Reporting will follow the European Sustainability Reporting Standards (ESRS) framework which is currently under development [approved since this article, see below].
EFRAG approves European Sustainability Reporting Standards (ESG Today)
The European Financial Reporting Advisory Group (EFRAG) approved the final version of the European Sustainability Reporting Standards (ESRS). Reporting will cover sustainability in strategy, business models, governance, and organisation, materiality assessments. A key change since the consultation stage of the framework development is a focus shift to include more application guidance on materiality judgement execution.
Partnership for Carbon Accounting Financials Insurance Associated Emissions Standard Released (PCAF)
The Partnership for Carbon Accounting Financials (PCAF) has released their standard to support reporting on Insurance Associated Emissions. The standard provides a framework to allow (re)insurance companies to measure and disclose the GHG emissions associated with their underwriting portfolios.
UK Regulator to Develop Code of Conduct for ESG Data and Ratings Providers (ESG Today)
The Financial conduct authority announced on the 22nd of November the formation of a working group to develop a code of conduct for ESG data and ratings providers. Activities and businesses of providers of ESG investments are generally not covered by markets and securities regulators. In The FCA announced that it has appointed the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) as the Secretariat for the newly formed group. The group will be co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May, and will also include investors, ESG data and ratings providers, and rated entities.
Switzerland adopts law requiring mandatory climate reporting for public companies (ESG Today)
Large Swiss companies and financial institutions will be required to publicly disclose information on their climate-related risks, impacts and plans, according to new legislation passed by the government’s Federal Council. Under the newly adopted “Ordinance on Climate Disclosures,” public companies, banks and insurance companies will be required to provide reporting based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The rules will apply to companies with 500 or more employees, at least CHF 20 million (USD$21 million) in total assets or more than CHF 40 million in revenue.
The “S” in ESG
Why the ‘S’ in ESG is starting to matter (again) – Societe Generale
The modern ESG movement started with socially responsible investing, in the last few decades however we have seen a shift to environmental impact and supporting governance – from companies themselves, consumers, and regulatory bodies. Following Covid-19, social factors are making their way back into the conversation. Three core issues here are 1. Regulation and disclosure around working conditions, 2. Employee wellbeing, and 3. Supply chain sustainability:
- It has been found that the first varies widely across industries and geographies – a gap that is being addressed by new regulatory requirements from the likes of the UN or EU.
- On the second, younger generations are challenging the traditional definitions of happiness at work, with much greater emphasis on values, ethics, and therefore political involvement, as well as individual treatment (e.g. flexibility and wellbeing)
- While child labour, exploitation and deforestation have been problems for a long time, the last couple of years have shown us how vulnerable many global supply chains had become. As companies now rebuild these, switching from ‘just in time’ to ‘just in case’, they also have an opportunity to raise standards and adopt more meaningful disclosures. Social license to operate is increasingly contingent on performance in these areas – with employees, consumers, investors, and activists all paying close attention to performance.
Three-tier approach recommended for insurers to manage social sustainability (Reinsurance News)
ESG considerations have become integral to insurance strategies but have mostly focused on “E” and “G”. The Geneva Association have published a report exploring how insurers can extend their inherent social utility to better addresses the “S” dimension of ESG. Insurers can create additional social benefits by weaving social considerations through their core insurance activities; for example, by promoting financial literacy and prioritising affordability to better serve lower- to middle-income populations. However, a major challenge is the creation of a common framework to measure social impact. The framework developed for carbon emissions disclosure, the Greenhouse Gas Protocol’s three scopes, could be a source of inspiration to measure social impact on insurers’ employees (scope 1), communities (scope 2), and across the value chain (scope 3), from service providers to customers and investees.
WFP, UK, Germany and World Bank come together to expand risk financing for communities vulnerable to climate shocks (World Food Programme)
The United Nations World Food programme and the world bank have agreed to scale up disaster risk protection financed by Germany and the UK for vulnerable communities and nations faced with catastrophic climate impacts, like storms and drought. $20m of funding will be provided through the new Global Shield Financing Facility (GS-FF), supporting expansion of climate and disaster risk funding in 23 countries around the globe. The funding supports the goals of the GS-FF, to scale up protection from climate risks before they occur.
COP27, IDF: “Insurance can influence systemic change” (Reinsurance News)
Michael M. Liès, Steering Chairman of the Insurance Development Forum (IDF) and Chairman of Zurich Insurance Group has said the IDF’s accouchements at COP27 are “a testament to how insurance can influence systemic change”. The IDF is a public-private partnership led by the insurance industry and whose members include the UN, World bank, and other international institutions. Announcements at COP27 include a new tripartite sovereign risk transfer programme for Nigeria, milestones in the development of the Global Resilience Index Initiative, and the Global Risk Modelling Alliance’s (GRMA) adoption as a key tool for the Global Shield.
Insurers can support progress toward Sustainable Development Goals (Insurance Information Institute)
The UN Sustainable Development Goals (SDGs) are a group of 17 global goals aimed at reducing poverty and protecting the planet for the future. The Insurance Information Institute and The World Bank Group have published a report discussing how the insurance industry can support governments and corporations achieving progress towards SDGs. This report highlights which SDGs insurance can most contribute to and how that impact would come about. This report considers the role of insurance in progressing SDGs from three angles:
- Impact of insurance through households, businesses, and the public sectors
- Dimensions of economic growth, social inclusion, and environmental protection
- From the point of view of an insurance company, how insurers can support the SDGs through underwriting and risk transfer, as an investor and as a corporate citizen/employer
How insurance and risk finance can build climate resilience in Africa (Insurance & Risk Finance Facility)
This year’s climate summit, COP27, “the African COP”, has brought global focus to the reality that Africa is more vulnerable than any other continent to the climate crisis despite contributing the least to global warming. Current climate adaptation finance flows are insufficient to meet the growing needs on the continent. The Global Centre on Adaptation have reported that 40 African countries have an investment gap of $265 billion to meet their adaptation needs by 2030.
In this context, insurance and risk transfer play an important role in building resilience to climate change by ensuring that financial burden caused by disasters does not directly fall on individuals, communities and countries. For example, in Nigeria, a Tripartite project with the German Government and the Insurance Development Forum leverages parametric insurance to protect 8.5 million people from flooding in Lagos State. This is one example of insurance and risk transfer products that can shore up the socio-economic resilience of vulnerable communities across Africa and beyond.
Activism & Action
Extinction Rebellion protesters target 13 London businesses and BEIS building following COP27 (MSN)
Extinction rebellion and other climate activities have targeted t13 London businesses and the Department for Business, Energy, and Industrial strategy in a string of demonstrations following COP27. Among those targeted was Arch Insurance, activists said demonstrations were in response to the failure of nations at COP27 to agree limits on fossil fuel use.
Insure Our Future calls on Net Zero Insurance Alliance founding members to immediately stop insuring new fossil fuels (Insure Our Future)
The Insure Our Future network cautiously welcomes the UNEP Net Zero Insurance Alliance’s (NZIA’s) ‘Statement of commitment by signatory companies’, but calls on the NZIA founding members to demonstrate this commitment by immediately excluding new oil and gas production from their underwriting. Positively, the commitment states that signatories commit to transition all operational and attributable greenhouse gas emissions, including their clients’ Scope 1, 2 and 3 emissions, from their (re)insurance underwriting portfolios to net zero in line with 1.5C. However, they also caution that criteria to meet limits are set at companies’ discretion as well as the lack of explicit callouts on development of new oil and gas project being incompatible with limiting to 1.5C.
SEC charges Goldman Sachs for not following ESG investments policies (ESG Today)
The U.S. Securities and Exchange Commission (SEC) has announced that it has charged Goldman Sachs’ asset management division for failing to implement and follow policies and procedures for some of its ESG funds. Goldman Sachs Asset Management (GSAM) has agreed to pay a $4 million penalty to settle the charges relating to policy and procedure failures between 2017 and 2020 in three ESG-themed GSAM portfolios. According to an SEC investigation into the funds, the failures included not having written policies in place for ESG research, and then failing to follow the policies once they were established. The charges come as regulators around the world are ramping efforts to fight greenwashing.
