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As new regulations threaten to force a shift in many insurers’ ESG strategies, leaders may need to focus on developing a strategy that not only meets new regulatory requirements but also enhances stakeholder engagement
The current landscape for environmental, social and governance (ESG) regulation is becoming increasingly complex for insurers. New standards are emerging worldwide as governments and international bodies tighten sustainability mandates. Insurance companies need to adjust their operations to remain competitive, yet ESG compliance presents numerous opportunities. Stakeholders in all areas of business, from employees to customers, are starting to become more engaged with ESG-related issues.
Developments in ESG-related regulation have not helped to assuage this growing pressure, and recent progress is forcing insurers to act. More specifically, the US Securities and Exchange Commission’s (SEC) recent climate disclosure requirements have created a new demand for companies to do their part in tackling climate concerns. Insurers must look to define a clear ESG strategy to meet stakeholder demand.
Understanding and adapting to ESG regulations
According to data from PwC, a quarter of global insurers believe that understanding ESG regulations and guidelines is the main challenge in moving an ESG agenda forward. Meanwhile, nearly half of insurance company CEOs say their firms are currently unable to measure their greenhouse gas emissions.
Steve Bochanski, climate risk modelling leader at PwC, says that the current landscape of climate-related reporting rules is “complex”, with new regulations emerging in many jurisdictions. These include the EU’s Corporate Sustainability Reporting Directive (CSRD), California’s new climate disclosure laws, the UK International Sustainability Standards Board’s (ISSB) sustainability disclosure standards, and the SEC’s climate disclosure rules.
“In response, insurers are creating specialised roles and teams to oversee and promote compliance with these evolving standards,” Bochanski explains.
He adds: “The integration of sustainability considerations into core business practices is now becoming table stakes, leading to an elevated role for chief sustainability officers and chief financial officers. Sustainability now plays a prominent role in decision making across various functions, including investment, underwriting and operations.”
Stakeholder pressure regarding ESG concerns has existed for some time, but the addition of regulation is pushing companies to act soon. Bessie Antin Daschbach, partner and leader of the ESG team at Hinshaw & Culbertson, argues that insurers have been and will continue to “grapple with ESG issues at multiple levels”.
“First, insurers are themselves business entities facing stakeholder market pressure just like any other sector. There is investor demand, talent demand, and so on, pushing businesses across the board to embrace sustainability and ESG in order to remain competitive.”
Daschbach notes that, combined with this existing pressure, present and upcoming regulations are now requiring insurers to do something, or do something differently, as well as ask the more important question of how.
She further states: “Add to that the patchwork of anti-ESG legislation in the US at the state level, including anti-ESG legislation targeting insurers directly in, for example, Texas and North Dakota. In those instances, insurers may also have to navigate whether they can consider ESG factors at all.
“Taking all that together, insurers definitely have their work cut out for them when it comes to sustainability and ESG. This is merely the initial level of consideration. For insurers, these issues are also all over their relationship with their insureds.”
Impact of the new SEC climate disclosure requirements
Under the SEC’s new climate disclosure requirements, insurers are now required to extensively report climate risks, scenario analysis, and the potential financial impacts. This includes specific challenges for property and casualty (P&C) insurers, who will need to model catastrophic events under the new guidelines. Bochanski says that the new disclosure rules can “provide companies with many benefits beyond just meeting compliance requirements.”
According to Bochanski, in order to comply with the requirements, insurers will need to disclose significant climate risks throughout their business and value chain, as well as analyse and evaluate their importance.
He adds: “They will also need to disclose climate change targets, scenario analysis details, and the potential impacts on their strategy and business model. P&C insurers face specific challenges with catastrophe modelling, as it typically focuses on a single climate scenario and has a one year time horizon.”
The SEC’s rules will also require disclosure of expenditures from severe weather events exceeding one per cent of the earnings before interest and taxes, according to Bochanski, with more detailed information on factors like natural versus man-made catastrophes. If deemed material, insurers will need to describe how severe weather events affected financial statement estimates and assumptions.
Developing an effective ESG policy
In this increasingly complex environment, insurers must develop and formalise an effective ESG strategy. According to Bochanski, the first thing insurers should consider is the “prevailing climate-related regulations, how to foster long-term business resilience, maintain competitiveness, and align with the company’s purpose.”
For captive insurance companies, it is also important to consider how an ESG strategy reflects its parent company and whether or not it aligns with the parent’s purpose and values. This also applies to their ESG investments. In effect, businesses with captive insurance interests should try to remain consistent across their entire ESG strategy. This will necessitate further consideration of stakeholder concerns, both within the captive and parent company.
Bochanski notes that these firms should ensure stakeholder interests are addressed in order to help support a “sustainability strategy that resonates with customers and investors”.
He adds: “The challenge lies in seamlessly integrating these considerations into a policy that not only addresses pressing sustainability issues, but also aligns with the insurer’s strategic vision and business goals.”
The benefits of a robust ESG strategy
Though it is a tricky minefield to navigate, a productive ESG strategy can lead to unique benefits. Bochanski says a strong sustainability strategy “helps position insurers to secure their businesses’ longevity, by aligning with sustainable practices and risk mitigation principles important for long-term success”.
“This strategy not only facilitates entry into new markets by meeting the growing demand for responsible business practices, but can also help enhance relations with investors who increasingly prioritise sustainability in their decision-making,” he explains.
He further adds: “Moreover, a commitment to sustainability principles helps attract and retain a dynamic workforce.”
Having a clear ESG strategy can also be a catalyst for insurers to take a leading role in driving sustainability. Daschbach says insurers are being given the opportunity to incentivise sustainability when it comes to coverage and rates and, in doing so, not only further mitigate risk but perhaps even create a competitive distinction in the marketplace.
Bochanski says that insurers can offer “advisory services to support clients in their journey towards decarbonisation,” both by “providing guidance on reducing greenhouse gas emissions in operations and infrastructure, assisting with emissions calculations, and promoting transparency in reporting”.
He emphasises: “Insurers can also play a key role in helping clients enhance resilience against extreme weather events, mitigating risks and potential losses.
“By innovating insurance products to align with the energy transition, such as offering enhanced warranty coverage for solar panels or insurance for renewable energy projects, insurers can actively support the shift towards sustainable energy practices.”
According to PwC, 80 per cent of insurers have future ambitions to develop mature or leading governance capabilities.
Future considerations
Despite what may feel like a lot to process already, the ever-growing raft of ESG-related regulations will continue to add to insurers’ workload.
Daschbach notes: “As far as mandatory disclosure frameworks in the US, both the California rules and the SEC rules are held up in litigation. And, so as far as those rules go, some suggest it’s pencils down. I don’t agree. If the litigation progresses swiftly, compliance could be right around the corner, at least in terms of the structure and resources it will take businesses to undertake compliance.”
Regardless, Daschbach explains that the SEC and California frameworks “are but two data points in a much broader narrative of increasing market demands and other frameworks coming online elsewhere”.
She adds: “There is plenty to keep an eye on and to assess whether businesses need to keep in line with.”
As 2024 unfolds, insurers will continue to navigate increasingly complex ESG regulations.
Their success will likely hinge on their ability to integrate these requirements into a comprehensive business strategy that not only meets regulatory demands but also positions them as leaders in sustainable business practices.
