(Re)insurers’ ESG approach: reflections on 2022 and predictions for 2023

Oxbow Partners’ Miqdaad Versi warns inaction is no longer a tenable position for insurers as he reflects on this year’s major ESG developments and highlights what will likely change in the year ahead.

Few topics have risen up the agenda of boards across the insurance industry this year quite like ESG.

Policymakers and high-profile events such as COP27 have driven the public agenda.

More and more investors and shareholders in the (re)insurance industry are considering ESG as part of their decision making in a market where capital is increasingly scarce.

Regulators across the globe (Europe and the UK in particular) are requiring disclosures and laying out their direction of travel.

And ESG is becoming a bigger issue for workers, who want their employer to reflect their values, as well as in the pitch to attract talent in a challenging recruitment environment.

Let’s not forget the activist shareholders and NGOs. The reputational risk of greenwashing or being perceived to be greenwashing, alongside the growing litigation risk (particularly from shareholders in the US), add to the considerations of executive teams.

The drivers for action are clear and inaction is no longer a tenable position.

As a result, we have seen substantive moves this year, albeit with significant variance.

On the one hand, a large minority have continued with their previous agendas, sometimes including internal recycling initiatives, diversity and inclusion programmes, forums for their staff and what was previously called corporate social responsibility. These (re)insurers focus on the very minimum of what they need to do – with minimum investment.

However, most recognise the writing on the wall and have started thinking about what else they may want to do, whether to get ahead of what they will likely be forced to do or because they believe it is the right thing to do.

Those earlier on in their ESG journey have documented what they already do in the space and begun developing a strategy, often aligned to a known framework such as the Principles for Sustainable Insurance, the Principles for Sustainable Investment or the United Nations Sustainable Development Goals. They have been dedicating resource, creating governance structures and pushing forward on ESG training, disclosure and reporting, sometimes beyond the regulatory minimum requirements. They may have basic ESG guidelines for their investments and underwriting based on reputational or litigation risk, and often also exclusions – although a sceptic might point out that the exclusions are sometimes lines of business they hardly used to invest in or write in the first place.

Those further along their ESG journey have a more sophisticated approach, not only assessing their internal carbon footprint, but also developing a more holistic carbon-conscious approach to their investments and underwriting. This may involve acquiring ESG or carbon-specific data with the goal of developing an understanding of the carbon footprint or ESG rating of their investment and underwriting portfolio. Some are even thinking about their approach to net zero and opportunities to develop innovative products that support the transition. Those most successful in this category have the buy-in of their senior management – a necessity for strategic progress.

The thought leaders in this space are contributing to, if not leading, cross-industry global initiatives. These include developing and implementing approaches to net zero for their operations, investment book and underwriting portfolios, as well as thinking about nature and biodiversity. These (re)insurers are also looking to build a more sophisticated approach to embedding ESG into underwriting, identifying metrics and starting to determine what mechanisms they can use to help steward their underwriting clients in the transition to net-zero. Many are considering how to maximise their social impact through innovative products in their core markets and public-private partnerships in emerging markets. These are typically larger (re)insurers with the resource to dedicate to this work.

Independent of their ESG maturity, we have also seen a number of eye-catching initiatives, including Munich Re Syndicate’s decision to exit oil and gas, Chaucer and Moody’s partnership on an ESG data dashboard, and Fidelis and Howden’s analysis on the correlation between ESG ratings and loss ratios in certain circumstances.

As we approach the end of this year, the natural question is what will change in 2023?

My prediction is that the gap between the front and the back of the pack will grow substantially in 2023.

Those at the back of the pack will continue to focus on their business-as-usual activities and the absolute minimum they have to do. They will use the likely pushback on ESG from certain quarters as an excuse for inaction.

And whilst there will be some movement on regulation which they will have to engage with, it is not expected to be transformative. The US is unlikely to make many big moves on ESG given the political landscape; Bermuda will continue to increase its regulatory oversight at a measured pace; and in the UK and Europe regulators look likely to focus on greenwashing, data providers, transition plans and transparency of investment products – none of which will be overly burdensome for (re)insurers. There may be increased guidance and (slightly) more stringent requirements from Lloyd’s but these are expected to be incremental to the foundations laid over the past 12-14 months.

So where will the transformative movement be?

In my view, this will be amongst a majority of the (re)insurance capacity of the world. Many of those wanting to move on ESG will already have dedicated resource, an ambition of where they are headed and an ESG programme for this year – something that was rarely the case last year.

Over and above the regulatory requirements, their programme will likely cover varying levels of progress across the following categories, none of which would be significantly impacted by some anti-ESG attitudes that will come to the fore in the coming year:

Training, education and comms: Everyone needs to know the basics about ESG, management have to understand the trade-offs and challenging decisions they will have to make, and specific teams need to be appropriately upskilled. This will take place via formal education programmes, training modules or informal workshops.

Data and metrics: Whilst many will already have chosen their data provider(s), the proportion which have actually been able to use the data to create metrics or support decision-making is low. Data availability is even more challenging for reinsurers (especially on the treaty side).

Underwriting decisioning framework: ESG considerations are not currently embedded into the decision-making of underwriters. This requires data, a coherent strategy, decision-making protocols, assessment criteria and associated processes, and a willingness to say “no” in certain scenarios. Whilst these will not all be solved in the coming year, with many waiting for the leaders to share their approaches, significant progress will be made.

Net-zero plan: The norm is going to be (re)insurers wanting to understand their own baseline carbon footprint – across their operations, investment and underwriting divisions – as well as their alignment and transition to net zero. Some of these will be formally aligned to international bodies such as the Net-Zero Insurance Alliance (NZIA) and Net-Zero Asset Owner Alliance but others will make progress independently, wary of setting an ambition they are unable to fulfil. However, with the NZIA expected to publish its target-setting protocol in January 2023 and its members disclosing their interim targets six months later, the issue will be front and centre of many (re)insurers’ minds in 2023.

Social impact: The biggest ESG focus over the past few years has perhaps understandably been on the “E” of ESG. Whilst this will continue, there will likely be increasing attention on the “S”, potentially using the helpful three-scope framework set out by the Geneva Association. Whether this is starting to think about issues such as assessing whether child labour is used by a (re)insurers’ counterparties in procurement, investees or underwriting, or considering how to close the protection gap in emerging markets through disaster risk insurance solutions, the “S” will have a greater focus compared to this year.

ESG opportunities: The transition provides a growing number of opportunities which will be increasingly taken up over the coming year. From transition products such as carbon credit insurance, performance and technology solutions, to renewable products to cater for the growing renewables market, this space will continue to grow.

What this will mean is a widening of the gap between those doing the minimum and those making progress against many or all of these categories.

This will lead to a serious challenge for the (re)insurance industry: what should we do with those who have been left behind and what are the ramifications of this for the global transition?

More collaboration, greater incentives for action and perhaps even regulation may form part of the answer. The worry is that this just might not be enough.

Miqdaad Versi is head of ESG and a principal at Oxbow Partners