Industry calls for greater guidance on ESG from regulators

Insurance companies in Europe and Asia Pacific have called on regulators to give the market clearer guidance on what they expect from firm’s environmental, social and governance (ESG) efforts.

Ratings firm AM Best surveyed underwriters in Europe and Asia Pacific and found whilst all are keen to drive ESG on both sides of their balance sheet they are still concerned over the mixed messages from regulators around the world.

“Insurers and reinsurers occupy a unique position in the ESG space, as both risk carriers and institutional investors,” said Best. “Therefore, ESG factors have the potential to affect both sides of their balance sheets and impact their results, throwing the spotlight on the importance of integrating them in underwriting and investment activities.”

AM Best said it expects the level of insurance industry involvement with ESG to continue to grow as regulators, rating agencies, investors and other stakeholders refine evolving definitions of ESG and adjust their approach to ESG.

“Regulators in particular are expected to set further disclosures and reporting requirements for the industry,” said the survey. “This is reflected in the survey, where 48% of respondents chose legislators/ regulators as a source of high or significant stakeholder pressure for considering ESG risks and opportunities (followed by investors and then rating agencies).”

Although not considered the most relevant ESG issue by all respondents, environmental risks remain at the top of lawmakers’ and regulators’ agendas for measurement and management.

“Public pressure has grown in support of environmental causes in the face of growing scientific evidence and high-profile campaigns,” it added. “Across the world, central banks and financial regulators have imposed environmental reporting requirements and stress tests as they strive to get a handle on the likely economic impact of climate risks. Insurers and reinsurers have found themselves in the front line.”

Best said there were a wide range of examples as to how regulators were becoming more proactive around their ESG requirements.

In France insurers have been required by law to disclose climate risks since 2016 under the so-called French energy transition law. In 2020, French insurers will also face climate stress tests, according to the supervisory authority, Autorité de Contrôle Prudentiel et de Résolution (ACPR).

The Bank of England’s (pic) climate stress tests will encompass insurance companies and are designed to analyse the impact on balance sheets of more frequent severe weather events such as floods and subsidence. These tests are now scheduled to come into force in 2021.

In Asia The Monetary Authority of Singapore (MAS) is taking active steps to promote sustainable financing in the financial sector, including engaging financial institutions to consider ESG criteria in their decision-making processes, supporting the adoption of industry standards and guidelines, encouraging industry-led capacity building efforts, and developing the domicile’s green bond market. It is also collaborating with local stakeholders and international counterparts to distil best practices.

In February 2020, the Australian Prudential Regulation Authority (APRA) wrote to all APRA-regulated institutions outlining its plans to develop a prudential practice guide focused on climate-related financial risks, as well as a climate change vulnerability 6 Trend Review ESG assessment. APRA also intends to update its Prudential Practice Guide on Investment Governance to enable licensees to comply with requirements that include ESG investments.

New Zealand aims to become the first country in the world to mandate climate risk reporting for its financial sector companies.

The rating firm said the insurers which participated in their survey were concerned over the myriad of differing approaches across the world.

“Respondents to the AM Best survey conveyed a need for more clarity from regulators to identify, measure and report ESG factors on a consistent basis globally,” it said. “Notably, more than 70% of the respondents called for more, or significantly more, direction from the authorities. Only 3% felt there was no need for further regulatory clarity around ESG – those respondents were overwhelmingly from the Asia Pacific region, whose regulators are in the process of introducing stringent ESG reporting measures.

“It is clear that regulators are increasingly concerned with climate risks, and while insurers remain focused on corporate governance, climate risks are rising up the agenda. Companies typically need good corporate governance to ensure they can run their businesses well today, as well as into the future. Lawmakers and regulators will take a long-term approach and think about potential threats to financial stability. Many of the environmental risks in scope may only manifest themselves in the longer term.”

However, the survey also found that the insurance industry was also in very different stages of their response to the demand for a delivery of greater ESG.

The study found:

  • Overall, there is a marked lag between recognition of ESG risks and action being taken to mitigate those risks
  • Larger (re)insurers with an international focus are typically more engaged and more active in the ESG arena than their smaller peers
  • In the main, investment activities are the primary focus of ESG integration, with only a few respondents highlighting underwriting initiatives
  • Corporate governance, product liability including cyber security, and climate risk1 are cited as the most relevant ESG issues for the insurance industry
  • Lack of transparent and comparable definitions and data is stifling greater application of sustainable investing practices

“Awareness of ESG factors has increased significantly, along with an acknowledgement that these factors require special attention,” said the study. “However, research from AM Best shows a lag between awareness of ESG risks and the actions taken to assess and manage them.”