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A fund managers guide to ESG risks and insurance — Why do insurers care about ESG?

New reporting guidelines; recent greenwashing claims; and scrutiny from investors is seeing ESG become a firm fixture on most insurers’ renewal checklists for clients.

Environmental, social, and governance (ESG) risks are not novel concepts. New reporting guidelines, such as the Task Force on Climate-related Financial Disclosure (TCFD); recent greenwashing claims; and scrutiny from investors is seeing ESG become a firm fixture on most insurers’ renewal checklists for clients. This leads to the question: Why is ESG so high on insurers’ agendas?

The rise of ESG investments

ESG investments increased in popularity during the coronavirus pandemic with record sums going into sustainable investments.[1] This not only represents positive shifts in society, but also, introduces emerging risks for insurers to be aware of. Like any business considering ESG, insurers answer to employees, shareholders, clients, and other stakeholders when considering their ESG framework. With this in mind, insurers are considering ESG when assessing potential and existing clients in their portfolio. Transitional climate risks are of particular interest as these will likely have an impact on the value of investments[2], creating exposures for asset managers and in turn insurers.

Alongside this, there is the prospect of more capacity being available for some clients as insurers seek to partner with companies that have good ESG ratings. This has been evidenced by Beazley who, from 1 January 2022, opened an ESG-focused syndicate, which deploys additional capacity for risks meeting certain ESG criteria.[3]

Claims are a key factor for insurers when deciding whether to cover a particular client, and emerging claims and litigation trends often lead to changes to underwriting practices. In 2021, the UN Environmental Programme reported that, as of 1 July 2020, at least 1,550 climate change cases had been filed in 38 countries. A number of these were consumer and investor fraud claims alleging that companies had failed to disclose information or had done so in a misleading manner.[4]

Greenwashing concerns

In 2021, the European Commission and consumer authorities screened websites to identify breaches of EU consumer law online and found that 42% of “green” claims were exaggerated, false, or deceptive.[5] Greenwashing is a recognised term for when a product is portrayed as more environmentally friendly than it is. In investment terms, we can split greenwashing into two strands. The first is intentional greenwashing, where asset managers overestimate or mislead investors on how environmentally friendly their products are. The second is where there is an “expectations gap” between what the investor expects from an investment, compared to how green the investment actually is.[6] According to reports, nearly half (46%) of UK advisors think asset managers should be fined for greenwashing.[7] This is likely to fuel regulatory action towards asset managers as we have begun to see with the 2021 SEC probe into a well-known asset manager.[8] This potential increase in claims is likely to see underwriters apply greater scrutiny on ESG when reviewing underwriting submissions.

Regulatory risks

The prospect of regulation relating to ESG has been simmering for several years. The past two years has seen both prospective and actual regulations come into place globally. The U.S. Securities and Exchange Commission (SEC) in the USA has developed proposals for climate disclosures in annual reports[9]; the EU has brought in Sustainable Finance Disclosure Regulation for owners of financial products to make public ESG disclosures[10]; and the UK has also set out its roadmap to climate-related disclosures backed by TCFD.[11] The Financial Conduct Authority (FCA) also announced the release of an ESG sourcebook for FCA regulated asset managers to make disclosures consistent with TCFD.[12] According to the 2021 EY Global Climate Risk Disclosure Barometer, asset managers obtained the lowest scores of those surveyed in terms of coverage and quality of climate risk disclosures when referring to TCFD recommendations.[13] Having a lower score could impact the ability for asset managers to secure insurance cover going forward. This also puts asset managers at risk of action from breaching disclosures and increases the likelihood of more regulation being introduced for them relating to climate disclosures.

Conclusion

ESG awareness and scrutiny is set to increase rapidly in the coming months and years. Insurers will be mindful of feedback from stakeholders regarding their own actions relating to enforced climate and ESG disclosures, and potential notifications and investigations which may occur as a result. Asset managers and other financial institutions need to engage with ESG and develop a good understanding of the risks related now, to ensure they are in the best position to approach insurers.

To help understand ESG risks, Marsh has recently launched a free ESG Risk Rating assessment. We recommend the tool to asset managers to allow them to take a deeper dive into their ESG strategies. To learn more about the ESG Risk Rating assessment and any of the topics raised in this article, please contact your local Marsh representative.

 

[1] ESG funds attract record inflows during crisis | Financial Times (ft.com)

[2] Paving the way forward: managing climate risk in the insurance sector - speech by Anna Sweeney | Bank of England

[3] Beazley launches Lloyd’s first ESG syndicate

[4] Global Climate Litigation Report: 2020 Status Review | UNEP - UN Environment Programme

[5] Screening of websites (europa.eu)

[6] What is Greenwashing? | Morningstar

[7] https://www.moneymarketing.co.uk/news/asset-managers-should-be-fined-for-greenwashing-study-suggests/

[8] Slowly, European regulators turn up the heat on greenwashing – Reuters

[9] ESG regulatory activity and standard-setting developments | EY - US

[10] A Guide to the EU Sustainable Finance Disclosure Regulation - Anthesis (anthesisgroup.com)

[11] FINAL_TCFD_REPORT.pdf (publishing.service.gov.uk)

[12] PS21/24: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers | FCA

[13] Why asset owners and managers fall behind on climate-risk disclosures | EY - Global