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Fred E. Karlinsky, Esq.
Fred E. Karlinsky, Esq.
GREENBERG TRAURIG, P.A.
(954) 768-8278
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Christian Brito, Esq.
GREENBERG, TRAURIG, P.A.
(954) 768-8279
Timothy F. Stanfield, Esq.
GREENBERG TRAURIG, P.A.
(850) 425-8547

ESG AND THE INSURANCE INDUSTRY: EXAMINING THE RELATIONSHIP 

The insurance industry is constantly evolving and is no stranger to change. Throughout its history, the industry has endured fluctuations in societal attitudes towards issues that impact the manner in which entire industries conduct business.  Most recently, companies across various industries have encountered “ESG”, which stands for environmental, social, and governance practices.  ESG, as it relates to the insurance industry, refers to efforts by insurers to operationalize environmental, social and governance risk assessments in their insurance underwriting workflows.  The term is generally used to describe a set of standards and business practices which are adopted by companies at the insistence of socially conscious investors to screen potential investments and business endeavors.  In this article we discuss this evolving topic and examine its potential impact on the insurance industry.

The Evolution

Despite its recent resurgence, ESG is not a new social construct.  Dating back to the 1960s, the term ESG has been used to refer to the evaluation by investors of environmental, social and governance factors. Since then, ESG has had a marked effect on the insurance industry, which has evolved and incorporated such concepts as impact investing, an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact, and corporate social responsibility, a self-regulating business model that helps a company be socially accountable to itself, its stakeholders and the public.

More recently, ESG has re-emerged as a central tenet of United States progressive political ideology.  Indeed, social issues and initiatives such as climate change and efforts at improving equality, diversity and inclusion, have taken center stage in American political discourse and have impacted the manner in which entire industries conduct business.  For the insurance industry, now more than ever it has become necessary to assess the impact of ESG on every facet of the business of insurance.  One key aspect of this analysis requires that industry participants develop a functional understanding of what ESG is and the goals that proponents of ESG seek to accomplish.

The Pillars of ESG

It is important to understand the individual pillars of ESG and what each stands for. The first pillar, and perhaps the most challenging from a reporting perspective, is the environmental pillar. This pillar examines a company’s activities, such as its use of materials, recycling, stewardship of environmental resources, investments and their impact on climate change.  Insurers must assess climate-related risks and opportunities within the context of their underwriting, operations and investments in order to assess potential financial implications.

The second pillar is the social pillar.  The social pillar addresses a carrier’s organizational practices and relationships with internal and external stakeholders.  This includes holding vendors accountable for their ESG practices, evaluating a company’s charitable endeavors, workplace conditions, opportunities provided to a company’s employees and the ethical standards of conduct implemented throughout the company.  The social pillar is buttressed by socially responsible investing or “SRI”.  SRI is a strategy pursuant to which companies that promote themes of corporate ethics, diversity, equity and inclusion are prioritized for investment. 

The third pillar, governance, focuses on how a company is managed.  ESG analysts often evaluate a company’s standards for ensuring accuracy and transparency in accounting, in pursuing ethical and diverse leadership, and ensuring the company is accountable to its shareholders. 

ESG and NAIC

In April of 2022, the Climate and Resiliency (EX) Task Force of the National Association of Insurance Commissioners (NAIC) adopted an annual Climate Risk Disclosure Survey. The survey will enhance transparency about how insurance companies manage climate-related risks and opportunities and incorporate international best practices.  The survey addresses the Financial Stability Oversight Council’s recommendation to “consider enhancing public reporting requirements for climate-related risks” in a way that would build on the core elements of recommended climate-related financial disclosures and   aligns the regulation of insurance companies in the United States with the international Task Force on Climate-Related Financial Disclosures (TCFD) framework that is currently being applied in Europe. Insurers in participating states with a national written premium amount of at least 100 million dollars must complete and submit an annual environmental survey. The current participating states are California, Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Minnesota, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont and Washington. More states are expected to participate.

As stated by the NAIC, the purpose of the Climate Risk Disclosure Survey is to:

  • Enhance transparency about how insurers manage climate-related risks and opportunities.
  • Identify good practices and vulnerabilities.
  • Provide a baseline supervisory tool to assess how climate-related risks may affect the insurance industry.
  • Promote insurer strategic management and encourage shared learning for continual improvement.
  • Enable better-informed collaboration and engagement on climate-related issues among regulators and interested parties.
  • Align with international climate risk disclosure frameworks to reduce redundancy in reporting requirements.

Insurers should consider “current and anticipated policy constraints and incentives in relevant jurisdictions, technology changes and availability, and market changes; and whether an organization’s physical locations or suppliers are particularly vulnerable to physical impacts from climate change” in the assessment.

The survey will require insurers to disclose company information related to the four survey focus areas: governance, strategy, risk management and metrics and targets. What does each focus area encompass?

              Governance: Insurers should disclose their governance regarding climate-related risks and opportunities.

              Strategy: Insurers should disclose potential impacts of climate-related risks and opportunities on the organization’s strategy and financial stability.

              Risk management: Insurers should disclose their use of metrics to assess climate-related risks and opportunities.

              Metrics and targets: Insurers should disclose the metrics that were used in line with their strategy process. 

ESG and Florida’s Financial Sector

Although some are receptive to ESG, others such as Governor Ron DeSantis of Florida and Governor Greg Abbot of Texas see it as a regulatory overstep. In August 2022, Texas published a list of investment firms that it says were possibly in violation of a 2021 law that bans state retirement and school funds from being invested in firms that have policies restricting investments in oil and gas and firearms companies. Shortly before, in July 2022, Governor DeSantis announced a rule prohibiting the state’s pension funds from considering ESG standards when making investments. This rule directs fund managers to instead invest state resources in a way that “prioritizes the highest return on investment” without considering the “ideological agenda” of ESG guidelines.

The rule may not be the last anti-ESG initiative spearheaded by Governor DeSantis.  It is also possible that Governor DeSantis intends to combat ESG practices through legislation that will amend Florida’s Deceptive and Unfair Trade Practices (FDUTPA) statute to prohibit discriminatory practices by large financial institutions based on ESG and social credit score metrics. FDUPTA allows an individual to sue a business for unconscionable business practices or unfair competition. If pursued, the new policy would allow those negatively impacted by a financial institution’s reliance on an ESG social credit score to sue the financial institution.

Critics of Governor DeSantis’ proposed efforts argue that by excluding ESG, Florida violates its own initiatives, which “require SBA fund managers to only consider maximizing the return on investment on behalf of Florida’s retirees” because they allege prohibiting ESG from consideration in investment decisions results in inferior investment performance. Governor DeSantis’ message for critics is clear: “In Florida, our policy's going to be based on the best interest of Florida citizens, not on the musings of woke corporations."

U.S. Department of the Treasury

Recent initiatives to address climate-related financial risk at the federal level include a proposed collection of data from property and casualty insurers regarding current and historical underwriting data on homeowners’ insurance, issued by the U.S. Department of the Treasury’s Federal Insurance Office (FIO) on October 18, 2022. The data collection process ensures homeowner’s privacy, aggregating at the ZIP Code level for a specific division of insurers, rather than collecting data on individual homeowners or other insured entities.

This action serves as a monumental step for the United States toward equipping the FIO with accurate, detailed and relative data necessary in determining the likelihood of, as well as mitigating the impacts of catastrophic disruptions of private insurance coverage in regions of the country that are especially susceptible to the impacts of climate change. Additionally, the proposal is also beneficial in the FIO’s efforts to assess both the availability of insurance, as well as the affordability of insurance throughout the nation. Through data collection, the FIO hopes to contribute to ongoing initiatives of federal regulators and policymakers to address climate-related hazards to the American financial system.

ESG and the SEC

In May of 2022, the Securities and Exchange Commission proposed rules and reporting formats to promote consistent, comparable and reliable information for investors concerning funds and advisers’ incorporation of ESG factors for registered investment advisers, advisers exempt from registration, registered investment companies and business development companies.  The new rules require more specific disclosures based on the ESG strategies pursued by funds and advisors.  For example, a fund touting its consideration of environmental factors would have to disclose the impact their investments have on greenhouse gas emissions.  Funds will be required to disclose their ESG goals and the progress they are making towards achieving their goals.  It is almost a certainty that the SEC will continue to expand its footprint in ESG and investors should keep a watchful eye on this activity.   

Future Expectations

Looking to the future of ESG in the insurance industry, the road ahead presents challenges. Over the coming decade, economic inequality, climate resilience, technological advancements across industries and corporate governance issues are likely to present immediate challenges.

The insurance industry appears to be keeping up with ESG initiatives, with ongoing action to examine, test and update ESG goals. According to a PwC Next in Insurance report, 93% of global insurers say they are very likely or likely to consider working with industry groups in their ESG efforts, followed by 70% in the case of partnerships with other companies. Likewise, 60% of insurers are very likely or likely to consider working with academic groups to determine how to address ESG within their organizations.

Moreover, the report also identified several global ESG initiatives many carriers are currently involved in:

  • 80% of global insurers say they have taken action or are planning to take action in the next 12 months in order to align with the UN Principles for Responsible Investment.
  • 72% of global insurers say they have taken action or are planning to take action in the next 12 months in order to align with sustainable development goals.
  • 70% of global insurers say they have taken action or are planning to take action in the next 12 months in order to align with the Task Force on Climate-Related Financial Disclosures.
  • 68% of global insurers say they have taken action or are planning to take action in the next 12 months in order to align with the UN Principles for Sustainable Insurance.

As the emphasis on ESG grows, the insurance and financial services industries will need to keep up. While support for corporate social accountability has slowly been building for some time, the pandemic and its subsequent economic disruption, social tensions and enduring climate change have exacerbated the desire for action on ESG measures by governments and corporations alike.

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