Environmental, social and governance (ESG) risks are not new concepts. New reporting guidelines, such as the Task Force on Climate-related Financial Disclosure (TCFD); recent allegations of greenwashing; and investor scrutiny sees ESG becoming a staple on most insurers’ renewal checklists for clients. This leads to the following question: why is ESG so high on the agenda of insurers?
the ascend ESG investments
ESG investing has grown in popularity during the coronavirus pandemic with record amounts of money being spent on sustainable investing.1
This not only represents positive changes in society, but also introduces emerging risks that insurers need to be aware of. Like any business taking ESG into account, insurers are accountable to employees, shareholders, customers and other stakeholders when reviewing their ESG framework. With this in mind, insurers take ESG into account when evaluating potential and existing customers in their portfolio. Transient weather risks are of particular interest as they are likely to impact the value of investments2creating risks for asset managers and, in turn, for insurers.
At the same time, more capacity may be available to some clients as insurers seek to partner with companies that have good ESG ratings. Witness Beazley who, as of January 1, 2022, opened an ESG-focused syndicate, which deploys additional capacity for risks meeting certain ESG criteria.3
Claims are a key factor for insurers when deciding whether to cover a particular customer, and emerging trends in claims and litigation often lead to changes in underwriting practices. In 2021, the United Nations Environment Program reported that as of July 1, 2020, at least 1,550 climate change cases had been filed in 38 countries. A number of them were fraud claims from consumers and investors alleging that companies failed to disclose information or did so in a misleading manner.4
In 2021, the European Commission and consumer protection authorities reviewed websites to identify breaches of EU online consumer law and found that 42% of “green” claims were exaggerated, false or misleading.5 Greenwashing is a recognized term when a product is presented as more environmentally friendly than it is. In terms of investment, we can divide greenwashing into two parts. The first is intentional greenwashing, where asset managers overstate or mislead investors about the environmental friendliness of their products. The second is where there is an “expectation gap” between what the investor expects from an investment and how green the investment is.6 According to reports, almost half (46%) of UK advisers think asset managers should be fined for greenwashing.7 This is likely to fuel regulatory action against asset managers, as we started to see with the SEC’s 2021 investigation into a well-known asset manager.8 This potential increase in claims is likely to see underwriters apply greater ESG scrutiny when reviewing underwriting submissions.
The prospect of ESG regulation has been simmering for several years. Over the past couple of years, both prospective and actual regulations have been put in place globally. The United States Securities and Exchange Commission (SEC) in the United States has developed proposals for climate disclosures in annual reports; the EU has put in place a Sustainable Finance Disclosure Regulation for owners of financial products to make ESG disclosures public; and the UK has also set out its roadmap for TCFD-supported climate-related disclosures. The Financial Conduct Authority (FCA) has also announced the publication of an ESG sourcebook for FCA-regulated asset managers to make TCFD-compliant disclosures. According to EY’s Global Climate Risk Disclosure Barometer 2021, asset managers had the lowest scores among respondents in terms of coverage and quality of climate risk disclosure when referring to the recommendations of the TCFD. A lower score could impact asset managers’ ability to obtain insurance coverage in the future. It also exposes asset managers to the risk of action in the event of breaches of disclosures and increases the likelihood that more regulations will be introduced for them with respect to climate disclosures.
ESG awareness and scrutiny is expected to increase rapidly in the months and years to come. Insurers will be alert to feedback from stakeholders regarding their own actions regarding mandated climate and ESG disclosures, as well as potential notifications and investigations that may result. Asset managers and other financial institutions need to engage with ESG and develop a good understanding of the related risks now, to ensure they are in the best position to approach insurers.