How Can ESG Policy and Regulation Unlock Opportunities for Insurers?
On June 16, 2021, S&P Global Market Intelligence hosted a webinar to look at a range of ESG initiatives taking place across the global insurance industry. This blog summarizes some of the key issues that were discussed.
Matthieu Bardout, Global Head of ESG Commercial Strategy, Banking and Insurance at S&P Global Sustainable 1 moderated the session that included five speakers:
- Butch Bacani, program leader for the UN Environmental Program (UNEP) Principles for Sustainable Insurance (PSI).
- Yvonne Braun, Director of Policy in Long Term Savings and Protection at the Association of British Insurers (ABI).
- Steven Bullock, Managing Director and Global Head of ESG Product Innovation and Analytics at S&P Global Sustainable1.
- Nina Chen, Sustainability and Climate Initiatives Director at the New York State Department of Financial Services (DFS).
- Dave Jones, a former Insurance Commissioner and Director of the Climate Risk Initiative at the University of California, Berkeley Center for Law, Energy and the Environment.
Five Key Takeaways
Yvonne Braun, ABI: Yvonne described how the ABI is the voice of the insurance and long-term savings industry in the U.K., and a lot is happening in the country. For example: (1) there are now clear requirements in place for pension providers to explain how they account for ESG risks, (2) the U.K. government will be making TCFD disclosure mandatory across the entire economy by 2025, and (3) the Bank of England launched the Climate Biennial Exploratory Scenario, which includes 10 of the U.K.'s largest insurers and long-term savings providers and will gather extensive data to enable a comprehensive assessment of the risk management required for climate change.The U.K. government is also reassessing the regulatory framework, which presents a large opportunity for insurers to support the green transition. To do that, however, some changes are needed to the capital rules. The ABI has submitted a paper to the U.K. regulators making the case for Solvency II reform to allow a wider set of assets to be eligible for the matching adjustment. That would enable the long-term savings sector to unleash both the capital they hold and the capital that is coming in future savings to help with the transition. Government can also play an important role by structuring transition investment opportunities in a way that guarantees predictable and long-term cash flows, making them attractive to the insurance sector.Yvonne feels there is a large role for insurers to play in the transition, given how connected the industry is to the economy and the lives of customers. Dave Jones, Climate Risk Initiative at the University of California: Dave explained how the National Association of Insurance Commissioners (NAIC's) Climate Risk Disclosure Survey asks a series of qualitative questions of insurers in the U.S. regarding what they are doing to address climate change. Looking back at answers given in 2016, it was clear that U.S. insurers were not paying enough attention to transition risk, particularly in their investment portfolios. In response, he launched the Climate Risk Carbon Initiative that required the top 670 U.S. insurers to report on their investments in oil, gas and coal enterprises, as well as utilities deriving more than 50% of their electricity from fossil fuels. Findings showed that there was approximately $555 billion (U.S.) in fossil fuel investments, and approximately $21.4 billion in thermal coal enterprises.The work has continued to evolve, and in 2018 Dave undertook the first climate risk scenario analysis of insurers' portfolios using the 2° Investing Initiative's Paris Agreement Capital Transition Assessment (PACTA) model under three scenarios for the portfolios of the 600 largest insurance companies. Findings showed a significant misalignment. David pointed to a number of critically important developments since that time. For example, in 2020 the Commodity Futures Trading Commission looked at the entire landscape of U.S. financial regulators. One of the recommendations was that the insurance industry should undertake climate risk analysis as part of its ongoing enterprise risk management governance, and that there should be mandatory disclosure of those risks.More recently, the Biden administration has issued an executive order directing the Treasury Secretary, as the Chair of the Financial Stability Oversight Council, to oversee a plan that would encompass all U.S. financial regulators and their approach to incorporating climate risk analysis in their supervision oversight of financial institutions. One component directs the Federal Insurance Office of the U.S. Department of Treasury to assess the adequacy of state insurance regulators' oversight as it relates to climate risk. Hopefully that will encourage more state insurance regulators to incorporate climate risk analysis and assessment in their supervisory practices. Nina Chen, New York State DFS: DFS supervises and regulates the activities of nearly 1,800 U.S. insurance companies and more than 1,400 banking and other financial institutions. As the first ever Director of Sustainability and Climate Initiatives at DFS, Nina works across insurance, banking, consumer protection and research innovation to integrate climate considerations into all programs. DFS is the only U.S. financial regulator to establish a holistic set of expectations on managing the financial risks from climate change for both banking and insurance-regulated entities.Nina described how DFS has now included questions on climate-related financial risks in the exams of insurers, and has been providing feedback to the responses. A report was recently released on the transition risk exposure that New York domestic insurers face based on the 2019 asset data. Findings showed that these investments have a meaningful exposure to carbon-intensive sectors, and exposures vary dramatically by insurer. Nina sees supporting insurers on the journey of managing climate risk as part of her work. DFS is also actively engaged with national and the international counterparts to facilitate consistency across jurisdictions, an important issue for all.
- A great deal of activity is taking place around the world to address climate issues and the role that insurance companies can play in the transition to a green economy.
- Insurers face substantial risks on the investment side of the business with extensive exposure to fossil fuel-intensive assets, and need to begin to seriously address this reality. They are also exposed on the underwriting side, especially with increasing regional and global losses being driven by catastrophic weather events.
- There needs to be important dialogues between the investment and underwriting groups, so they are in sync for their firms to meet net zero targets.
- The regulatory world is moving towards mandatory disclosure, and insurance companies should take up these issues now.
- The industry already uses catastrophe modelling techniques, so there is an opportunity to start integrating more forward-looking climate scenarios into that analysis to have a better understanding of exposure to a vast array of different transition and physical risks.
Butch Bacani, PSI: PSI now has 200 members worldwide that have signed global ESG principles that are tailored to the insurance industry, including 100 insurance companies that represent $14 trillion in assets under management (AUM). An extensive network of insurance market bodies and supervisory authorities have also signed the PSI. Butch explained that the priorities for the organization include: (1) understanding different climate change scenarios and their impact on insurance portfolios across physical, transition and litigation risks, (2) determining the meaning of ESG for underwriting, (3) reviewing the agenda for life and health insurers on the underwriting side, such as looking at the connection of climate change and mortality, and (4) establishing a Net-Zero Insurance Alliance. The UN-convened Net-Zero Asset Owner Alliance is a sister initiative being led by insurance companies and pension funds committed to the transition.
Steven Bullock, S&P Global Sustainable1: Steven reviewed recent research conducted by his team to provide visibility on some climate-related risks and opportunities relating to the investment activity of the insurance industry in the U.S. Taking Trucost Environmental data, which is carbon emissions and fossil fuel exposure of listed and private companies, along with NAIC information on disclosures, team members were able to understand the different types of assets in insurance portfolios to calculate the climate-related issues. They then created a financial hierarchy using S&P Global data. For example, investments in corporate bonds were mapped to the issuer, and investments directly in subsidiary companies were mapped to the ultimate owner.
The team looked at almost 4,000 insurance portfolios, representing approximately 1.65 million securities and $6.5 trillion in AUM. Within the portfolios, there was exposure to fossil fuel-related activities amounting to approximately $582 billion worth of revenue, or 9% overall exposure.
On the opportunity side, the team looked at activities linked to the sustainable activities outlined in the EU taxonomy, which are those that can contribute to the transition to a low-carbon future. Findings showed that 22% of the AUM was linked to sustainable activities, indicating some of the potential opportunities. The team also found extensive variation depending on the size of a portfolio. The approach and findings underscores the fact that a very detailed analysis of portfolios and their exposure to fossil fuel activities is required to truly understand a company or the constituent-specific factors.
In wrapping up the session, it was agreed that collaboration is needed to move things forward, as no one organization has all the answers.