8 December: What’s going on in ESG and insurance?
December 8, 2022 Miqdaad Versi
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The highlight this month: How to navigate across jurisdictions
Read our summary and analysis below.
Analysis
How to navigate across jurisdictions
More and more global (re)insurers are facing different challenges across different jurisdictions. Nowhere is this more stark than in the approach of public authorities in certain US states towards ESG.
Florida Governor Ron DeSantis passed a resolution to no longer allow ESG considerations to be used by fund managers for the state’s $228 billion of pension funds. And now, we see news that Florida will divest $2 billion of assets managed by BlackRock by the end of the year, citing the investment manager’s integration of ESG considerations in its investment process.
Independent of the merits (or indeed de-merits) of these decisions, they create an increasing challenge for insurers who have a presence in the US. Many understandably worry how this may hinder progress on ESG related issues, and this definitely is a serious risk, particularly for those with a significant US portfolio. However, there are some important considerations to note.
Firstly, it is unclear whether this “concern” on ESG would extend to (re)insurers who are providing capital and protection, especially in the property cat space, for example.
Secondly, were this serious concern to extend to (re)insurers, it is unclear whether a bifurcated underwriting strategy may be an option, with US-linked deals treated separately and without ESG considerations, compared to others. Having an exception for a Group’s approach for the US would be sub-optimal and likely difficult to implement, but would likely be sufficient.
However, there may simply be a way forward which involves re-naming ESG as “sustainability” or “corporate social responsibility”, which may avoid the same ire from the US lawmakers.
There is no simple answer, and given the importance of the US, the issue cannot simply be dismissed. Definitely one to watch in the coming year, as ESG considerations start to more effectively be embedded into underwriting decisions.
Summary
ESG and Underwriting
Higher ESG ratings lead to improved underwriting performance (Howden)
The largest study of its kind to date has found a correlation between higher ESG ratings and lower loss ratios. The study joint study was undertaken by international insurance broker, Howden, and leading specialty insurance and (re)insurance business Fidelis. Loss ratios across 30,000 policies, representing c. $9b in GWP were considered. Environmental ratings have the strongest correlation with loss ratio performance but varies by line of business and industry – property shows the strongest correlation.
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Insurance Council launches insurer roadmap to net zero (The Insurance Council of Australia)
The Insurance Council of Australia (ICA) released a landmark paper outlining the way insurers can achieve net zero emissions for their operations by 2030 and across the entirety of insurers’ activities by 2050. Towards a Net Zero and Resilient Future draws on extensive consultation with the $60 billion general insurance sector over the last 12 months. It includes a pathway for insurers to undertake the most difficult task of reducing emissions associated with underwriting activities, the claims supple chain, and investments.
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The next year for insurers
WTW study finds developing ESG strategy a key focus for risk managers (Reinsurance News)
A recent WTW survey reported that more than half of risk managers are significantly involved in their organisation’s ESG efforts, though 77% believe they should take a more active role in ESG strategy and initiatives. In WTW’s 2022 ESG Global Risk Managers Survey, which includes 312 corporate risk managers worldwide, one-third said ESG currently influences risk management strategy, and an additional 9% said it is set to do so during the next two years. 74% of respondent’s stated an improved ESG score is a core focus of their business. However, many have done so without adopting specific goals or key performance indicators, suggest the firm.
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Sustainability will be key for insurers in 2023 as global concerns mount (Environmental Finance)
Key issues insurers face in the coming year include:
- Growing supply is leading to investments in “greener” insurance companies – “The greener the better” is the motto of a growing number of insurers. We believe that insurers who engage in activities which help mitigate climate change and promote SDGs in 2023 have a competitive advantage with investors who are increasingly willing themselves to be active players in combatting climate change.
- The role of social and sustainability bonds – A growing number of European insurers are opting to finance their green projects by issuing green, social and sustainability bonds. This allows for substantial investments in sustainable projects. It also allows investors to examine how the money raised is allocated. Since September 2019, more than €11bn has been raised in a green and sustainable format, of which 80% is in subordinated and 20% in senior.
- Inflation and cost-of-living crisis pose a challenge to non-life profitability – Rapidly rising inflation is pushing the costs of losses higher, and that poses a threat to non-life insurers’ profitability, with motor, accident and general liability taking the most significant hit. The cost-of-living crisis and anticipation of inflationary recession across Europe can have another negative impact on the insurance business: it can also result in decreased demand for insurance products.
However, rising interest rates could also be a positive development for insurance companies, as they promise greater returns on their investment portfolios. For the last decade, low interest rates have been weighing heavily on non-life profitability, as well as posing challenges for life insurers.
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Florida Pulls $2 Billion from BlackRock Due to ESG Investing – ESG Today (ESG Today)
Florida will divest $2b of assets currently managed by Blackrock by the end of the year citing the investment manager’s integration of ESG considerations I the investment process. Calling BlackRock’s support for ESG a “social engineering project,” Patronis said that “it’s got nothing to do with maximizing returns and is the opposite of what an asset manager is paid to do.” The announcement marks the latest move in an ongoing anti-ESG push by Republican politicians in the U.S., including a resolution passed by Florida Governor Ron DeSantis to no longer allow ESG considerations to be used by fund managers for the state’s $228 billion of pension funds.
Read the full article
Regulation, reporting, and policies
Switzerland Adopts Law Requiring Mandatory Climate Reporting for Public Companies, Banks (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 today by the government’s Federal Council. The reporting will align with recommendations outlined by the Task Force on Climate-related Disclosures (TCFD). Coverage includes climate-related risks, company impacts on climate change, disclosure of all direct and indirect greenhouse gas (GHG) emissions, and reduction targets on implementation of goals. Rules are slated to come into force early 2025.
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SEC Charges Goldman Sachs for Not Following ESG Investment Policies (ESG Today)
The U.S. Securities and Exchange Commission (SEC) announced today 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 $4m to settle the charges. Charges relate to policy and procedure failings between 2017 and 2020, including not having written policies in place for ESG research and then failing to follow the policies when they were implemented.
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BlackRock adopts formal ESG policy for flagship DC default (Professional Pensions)
BlackRock has incorporated a formal ESG policy into its £9.2bn LifePath investment strategy, the Policy aims to achieve 50% reduction in carbon emission intensity by 2029. The LifePath strategy is Blackrock’s flagship defined contribution default strategy, providing members with broad and diversified access to 11 asset classes through low-cost and transparent index funds. BlackRock said the addition of a formal ESG policy was a “continuation and evolution of LifePath UK’s ESG journey” and reflected scheme members’ requirements for sustainable objectives alongside evolving pension regulation.
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Asset managers have now removed the European Union’s top ESG designation from at least $125 billion in portfolio funds, as figures from Axa Investment Managers add to the industry total. Axa alone have redesignated 45 Article 9 funds, affecting $21b of portfolio assets. The EU said the designation it must be reserved for 100% sustainable investments, with some allowances for hedging and liquidity – a threshold that less than 5% of Article 9 funds actually meet. Morningstar.Inc has said the move threatens angering clients and has led to criticism of the EU’s Sustainable Finance Disclosure Regulation (SFDR). This has also raised questions around the value of SFDR – with widespread understanding in the industry of its limitation.
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ABI to transform sector with DEI Blueprint (ABI)
The Association of British Insurers (ABI) has published an ambitious new Blueprint, setting out a multi-year strategy and work plan to improve Diversity, Equity and Inclusion across the insurance and long-term savings industry. The Blueprint takes a holistic approach to DEI and sets out priority areas for the ABI to lead, good practice for industry, and opportunities for collaboration with experts. It looks at each stage of the employment journey: from using inclusive recruitment practices to attract the best talent from all backgrounds, to helping employees grow and progress their careers in the sector, and advancing understanding of what works to drive improvement.
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