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Environmental, social and governance-related activities and how companies disclose and report them are coming under heightened scrutiny, leaving businesses exposed to a growing range of risks.
The threat of regulatory enforcement actions, shareholder activism and increased societal concerns around a range of issues have created potential liabilities for a broad range of corporations.
Insurers, reinsurers and brokers are responding to the increased concerns with an evolving stable of insurance coverages, risk management services, technologies and practices intended to transfer or manage ESG exposures.
While much of the focus has been on climate risk and addressing the risk financing needs of businesses as they transition to a low-carbon economy, reputational risks are also coming to the forefront as organizations increasingly find themselves held accountable for ESG issues.
Social issues have also risen in significance out of the #MeToo and Black Lives Matters movements, along with diversity, equity and inclusion considerations, experts said.
Cyber is an ESG risk trend that is of significant concern, driven by the rising frequency and severity of cyberattacks and an increase in data security regulations. In Allianz Global Corporate & Specialty SE’s 2022 Risk Barometer released in January, respondents ranked cybersecurity resilience as their major ESG priority. Climate change was ranked as the second top ESG concern.
Pollution incidents and environmental disasters, and lack of diversity on boards and in the workforce rounded out the top ESG concerns, Allianz said. Supply chain disruptions are also seen as a top threat as companies come under pressure to be more transparent about their suppliers and the environmental impact of their supply chains.
Demand for ESG-specific coverages is growing, said Meredith Jones, Nashville, Tennessee-based partner and global head of ESG at Aon PLC. The brokerage currently offers more than 50 ESG-related services across its risk diagnosis, risk advisory and risk transfer practices, she said.
ESG is an area of focus for Aon this year, Ms. Jones said. “The regulatory pressures, the litigation risks, the social pressures are all coalescing,” she said.
Historically, ESG interest has been high among companies with high environmental or personnel exposures, such as those with workforce safety issues or high greenhouse gas emissions, Ms. Jones said.
“Pharmaceuticals, health care, technology, banking — it’s come up with lots of different types of clients,” she said.
Renewable energy, electric vehicles, parametric insurance and ESG-focused directors and officers liability coverages are some of the areas where insurers are focused on ESG, according to a December report by Oldwick, New Jersey-based ratings agency A.M. Best Co. Inc.
Existing insurance coverages and products will evolve, and new ones will emerge that address the growing number of ESG risks, Best said in the report.
Several insurance organizations, including Lloyd’s of London and Zurich Insurance Group Ltd., announced plans to expand their insurance coverage to target the green energy sector in the lead up to the United Nations COP26 meeting held in late October and early November 2021, for example.
Although the initiatives are expected to be small initially relative to total business written, they may become more material over the medium to long term, Best said in the report.
The renewable energy sector and the insurance market supporting it are seeing explosive growth, said Brian Tyluki, New York-based senior vice president and senior underwriter at GCube Insurance Services Inc., a unit of Tokio Marine HCC.
By 2026, global renewable electric capacity is expected to rise more than 60%, according to the Paris-based intergovernmental organization International Energy Agency’s annual renewables market report published in December. “Renewable power will make up about 95% of the increase in global power capacity through 2026, and solar is supposed to account for half of that. The writing is on the wall,” Mr. Tyluki said.
“We don’t have enough people to adequately handle the level of submissions we see in terms of the renewals we are handling and new business,” he said.
The projected growth in renewables is driven by stronger support from government policies and more ambitious clean energy goals announced before and during the COP26 climate change conference, the International Energy Agency said. Many insurers have also set emissions targets for their organizations and a growing number have said they will restrict coverage for companies that build or operate coal mines and plants.
Environmental insurance, whether it be a site-specific policy or coverage for contractors working at a site, is becoming much more mainstream, said Daniel Drennen, national environmental practice leader at Amwins Group Inc. in Atlanta.
Previously, only about 15% to 20% of policyholders would buy an environmental insurance policy, but now “you’re definitely seeing tremendous growth in this area,” Mr. Drennen said.
As insurance coverage evolves there is a heightened focus on ESG risk management, experts said.
Clients want to know the extent to which their management of ESG risks will be reflected in their insurance programs, said Amy Barnes, London-based head of sustainability and climate change strategy at Marsh LLC.
“In some areas, such as directors and officers, we’ve got good data that shows us that there is a clear relationship between good ESG risk management and improved D&O underwriting performance,” Ms. Barnes said. Marsh last October introduced a directors and officers liability initiative around ESG (see related story).
Part of the challenge in managing ESG risks is limited data, Ms. Barnes said. “Intrinsically we believe that a company with good ESG risk management will be a better liability risk, that a company that is trusted will have fewer or less severe liability losses, but we can’t prove that correlation yet,” she said.
Most companies have disclosed corporate social responsibility in their statements and proxies for years, but there is a heightened focus by the U.S. Securities and Exchange Commission, state regulators and others on how companies address the risks, said Ziad Kubursi, New York-based head of financial, executive and transactional liability at Hartford Financial Services Group Inc.
In the past, companies were not held accountable for what they did or didn’t do in relation to corporate social responsibility, but ESG disclosure regulations are changing the dynamics, he said.
“Now you are going to see enforcement actions, shareholder actions and client/customer concern about the companies they are doing business with and purchasing coverage from, and all this has an impact on directors and officers liability insurance,” Mr. Kubursi said.
Insurers can play an important role in ESG risk management, such as by advanced modeling of climate risks and in incentivizing change by putting capacity into a sector or by encouraging the rebuilding of properties in a more resilient way, several experts said.
QBE last November introduced a tool to provide businesses with a risk management framework to assess ESG risk, said Mark Pasko, chief legal officer and corporate secretary at QBE North America in New York.
“The tool presents risk managers and insureds with a series of questions to challenge them to think about sustainability, what they have in their operations, how they market and conduct themselves. It’s getting them to think critically of what their operations look like, to be honest about what sustainability is,” Mr. Pasko said.
Traditionally a business might not have looked at the construction materials in its buildings or at its energy practices and operations, and “now they should,” he said.
ESG risk management is “good business for us, too, because risks that think about sustainability are typically better risks for us,” he said.
Opportunities — and risks
Despite the growing opportunities for insurers in the development of ESG-related coverages and risk management tools, the products and services do not come without risks, experts said.
In the renewable energy sector, the speed of project developments, continuously evolving technologies and rising natural catastrophe risks can be challenging, said Mr. Tyluki of GCube, an insurer of on- and offshore wind, solar and energy storage risks in Europe and the United States.
A 2019 hail loss at a solar farm in Midland, Texas, resulted in a $75 million loss for GCube because it was insuring the asset 100%. “That loss in particular shaped the industry,” and since then the insurer has taken steps to significantly mitigate its exposure by sub-limiting natural catastrophe risks, Mr. Tyluki said.
Insurers and reinsurers face risks both on the assets and investments side of their business from the climate transition.
If underwriting is inadequate there is a risk that coverage could be mispriced, Ms. Jones of Aon said. There is also an investment risk if insurers don’t take into full account ESG concerns, she said.
The corporate social responsibility and governance aspects of ESG have always been a risk for companies, but investors and insurers are asking organizations more questions, said Keith Fortson, global head of ESG at Riskonnect Inc., an Atlanta-based risk management technology company.
“There’s been a fundamental shift in the insurer landscape on both the asset side and liability side,” Mr. Fortson said. For instance, many assets held by insurers that used to be considered stable, such as real estate, are changing with ESG concerns and the effect of different weather patterns, he said.
“We are seeing reallocations in assets, and that same lens applies to the liability side. If I am going to write a policy for you, I need to make sure you have all of these risks covered,” Mr. Fortson said.
As insurers look to meet the risk financing needs of businesses transitioning toward a greener economy, the underlying risks may be more nuanced.
It’s critical for insurers to do their due diligence regarding ESG, said Ralph Banbury, London-based management liability underwriter at CFC Underwriting Ltd.
“There is a huge focus on the environment, as there should be, but the social pillar is equally as important,” Mr. Banbury said. The social pillar encompasses employee welfare, health and safety, cyber protocols, supply chain, and diversity and inclusion.
With the rise in events-driven litigation, companies face growing D&O risks from ESG risks whether from failure to act, not having adequate procedures in place, or the potential for “greenwashing” or overinflating their ESG credentials, he said. Companies can also come under fire for the use of child labor in their supply chains, he said.
Insurance buyers can expect increased due diligence from insurers around their management of environmental, social and governance risks, which may affect coverage and pricing.