Climate move will drive greater (re)insurer ESG

The decision by the United States to rejoin the Paris Agreement on climate is likely to be the catalyst for the country’s underwriting firms to step up their efforts on environmental, social and governance (ESG) activities.

The US will officially rejoin the agreement on Friday and rating firm AM Best has said the increased legislative and regulatory emphasis on climate risk will prompt US (re)insurers to accelerate their ESG strategies.

In its commentary, “Rejoining Paris Agreement Spurs US (Re)insurers’ ESG Adoption”, the firm said the drive towards greater sustainability was gathering momentum globally and the move by US President Joe Biden to focus on the flight against climate change would create a new dynamic for the country’s risk market.

“Concerns about exposure to climate risk, as well as reputational risk, are likely to persuade a growing number of US (re)insurers to consider ESG factors in their investing and underwriting activities, as the Biden administration encourages the development of sustainability regulations and projects,” it said. “AM Best’s ESG survey of insurers in Europe and Asia Pacific revealed a majority of (re)insurers consider that failure to act on stakeholder pressure around ESG issues could lead to long-term reputation challenges.

“Furthermore, reducing reputational risk was the most-cited reason by European and APAC survey respondents for integrating ESG factors in investment mandates. The implementation of more stringent climate targets at a federal level is very likely to have an impact on high-emitting sectors, like the coal industry.

“This might result in increased environmental regulation and the implementation of incentives, which would aim to accelerate the transition from a high to low-carbon economy.”

Outside the United States – in Europe and Asia Pacific, in particular – (re)insurers have been increasing the integration of ESG factors into their investment and underwriting activities. However, there has been a perception that U.S. (re)insurers have lagged behind their global counterparts added the firm.

The commentary said the concern for the industry is its reputation and the risk of a rise in stranded assets as carbon heavy fuels become ever more unpopular.

“Such measures to support the transition may encourage insurers to enhance their investment strategies by integrating ESG factors, to limit their exposure to what could become stranded assets – those assets that may lose their value unexpectedly or prematurely due to external factors,” explained AM Best. “The Keystone XL pipeline provides an example: on inauguration day, President Biden rescinded the licence, through executive action, for the planned 1,179-mile oil pipeline between Alberta, Canada and Steele City, Nebraska.

“On the underwriting side, (re)insurers that provide insurance cover to so-called ‘toxic’ industries may come under increased scrutiny and suffer from publicity that could damage their reputation by association.

“If capacity is withdrawn as a consequence and coal companies, for example, are unable to find sufficient insurance cover in the international (re)insurance market, there could be business opportunities created in the captive insurance space.”

The commentary concluded: “Efforts to support the transition to a low-carbon economy and meet the US climate targets under the Paris Agreement should result in an increase in green infrastructure, including solar and wind parks and levees/floodgates to improve flooding resilience.

“Some of these new technologies may require (re)insurers to redesign their product offering to take into account new risks. These projects represent significant opportunities for (re)insurers that can embrace the shift and tailor their products accordingly.”

Outside the United States – in Europe and Asia Pacific, in particular – (re)insurers have been increasing the integration of ESG factors into their investment and underwriting activities. However, there has been a perception that U.S. (re)insurers have lagged behind their global counterparts added the firm.

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