Major institutional investors have described the insurance industry’s ESG disclosure regime as weak amid growing pressure for the industry as they increase pressure on the firms in which they have a stake.
Ratings firm AM Best have released the results of a major study of European and Asian re/insurers on their approach to ESG. It found that many listed reinsurers said it was the investors that are creating the most pressure to consider ESG risks and opportunities.
As major institutional investors publicly increase pressure on their invested companies, including the largest reinsurers, to do more to manage climate risk, the world’s largest wealth fund said the insurance industry’s ESG disclosures are “generally weaker” than in many other sectors.
“Overall, the consideration of ESG factors has grown across the insurance value chain, as companies adapt to the changing risk landscape,” the report explained. “Changes in reinsurers’ attitude and behaviour, driven by increased ESG integration, could be a source of additional pressure for some insurers, particularly the laggards.
“Insurers will only accept certain risks if they have sufficient reinsurance support to back them. If some reinsurers are pulling away from certain industries, such as coal, insurers may have more difficulty finding capacity to allow them to provide cover.”
The rating firms warned this could lead some insurers to face higher reinsurance costs and potentially being forced to work with lower-rated reinsurers. Alternatively, it may force them to adapt their own business models.
The survey of European and Asia Pacific-based (re) insurance companies, included five of the 10 largest reinsurance carriers by non-life gross written premium and all the listed reinsurers in the regions.
Three of the top five reinsurers said investors were exerting “high pressure” or “significant pressure” on them to consider ESG risks and opportunities. The other two cited “moderate pressure”.
AM Best added the survey found widespread recognition among European and Asia Pacific re/insurers that the insurance industry has a pivotal role to play in the ESG arena.
“Proper understanding and integration of ESG factors are increasingly crucial to the industry’s long-term viability,” said the report. “Improving resilience and ensuring the sustainability of business models are common themes behind re/insurers’ ambition to integrate ESG factors into their operations.
“But as investors are taking a growing interest in the ESG credentials of their investees, it also becomes a way for companies to ensure they maintain strong financial flexibility by remaining an attractive investment proposition.”
Another benefit according to Best is the growing integration of ESG considerations by insurers and reinsurers can also be a catalyst to reduce the protection gap by working on adequate protection solutions for more vulnerable populations.
For the investors many said they had found it difficult to get a clear view of which companies will endure, struggle or even flourish as the environment changes, regulation evolves, new technologies emerge, and customer behaviours shift.
Norges Bank Investment Management, that manages the country’s sovereign wealth find which owns not insignificant stakes in nearly all listed re/insurance companies highlighted insurance as one of the industries with “generally weaker” reporting on ESG disclosures. By contrast, it said telecommunications, personal and household goods, and health care sectors were deemed to have the best climate risk reporting.
“Without reliable ESG information, financial markets will find it challenging to accurately price related risks and opportunities correctly,” added the report. “Over recent years, partly as a result of regulatory requirements, ESG disclosures have emerged, and institutional investors, including several that hold meaningful stakes in large re/insurance companies, are becoming increasingly bold in asserting the link between sustainability risk, particularly climate risk, and investment risk.
“Many are demanding greater engagement and transparency from the companies in which they invest. Crucially attention is focusing not just on businesses and corporations with poor ESG credentials, and those perceived as polluters, but is shifting increasingly across the value chain to companies financing such corporations, and firms underwriting that financing.”