ESG developments echo Solvency I to Solvency II revolution

The introduction of the Solvency II regime—which introduced a harmonised and robust prudential framework—was a “revolution” for the insurance industry, according to DLA Piper partner Luc Bigel, and environmental, social and corporate governance (ESG) criteria will follow the same path.

Speaking to Intelligent Insurer, Bigel explained that the move from Solvency I to Solvency II required masses of preparation and “internal sensitisation among the various people involved”, with people having to “think about it, understand, discuss, implement new processes”. It seems the industry is now making the same preparations for ESG.

As of 2022, under the EU Taxonomy Regulation, all entities will need to report in respect of climate change mitigation and adaptation objectives.

At the same time, financial entities are currently required to make level one disclosures under the EU Sustainable Finance Disclosure Regulation (SFDR)—a regulation aimed at increasing transparency around sustainability claims made by financial market participants. Level one disclosures relate to the entities themselves and concern their policies on decision-making on sustainability risks.

Next year, financial entities under the taxonomy framework will need to report their eligibility and alignment under all six objectives defined in the Taxonomy Regulation.

On the SFDR front, entities will be required to provide level two disclosures, which cover their financial products and their sustainability risks.

It’s this emergence of new regulation and government awareness, combined with the increasing number of climate disasters, that is driving ESG higher up the agenda across the industry.

“The emergence of ESG laws is not new. The first interesting legislation dates from 30 to 40 years ago but the new thing is that now it has a more binding force. The scope of these regulations touches so many different businesses and it will continue to grow,” said Bigel.

He added that in addition to touching all insurance-related businesses, ESG is impacting the various functions and people working in each of these companies.

For example, on the underwriting front, new methods are being slowly introduced because there are new risks.

“New questions will arise for underwriters to understand what kind of business they’re going to insure. The questions now can be ‘has a climate change risk change assessment been done?’, ‘who is responsible for climate reporting?, and ‘what structures have been implemented to ensure compliance?’,” he said.

For loss managers and claims handlers, greenwashing is top of the agenda and something that companies must “keep aware of and master”.

Meanwhile, legal and compliance must “understand and grasp all of the legislation, which is very onerous” so that they know what obligations they will have to fulfil, he said.

An eye on the future

In recent years, there have not been so many binding obligations so ESG requirements have been relatively manageable, said Bigel.

“Tomorrow, it won’t be the same. What I’ve seen is that large insurance groups have been doing their best to take into account those ESG matters. There’s a natural good reputation for insurers doing this, in addition to being compliant with laws,” he said.

But Bigel has also seen other large groups that have, to date, done only what they are required to do and no more.

On the other hand, many smaller insurers are truly focusing on ESG, said Bigel, who believes the rationale behind this is that it will serve as a differentiator in the market.

“Behind all of that, for me, is that there is still the idea that the raison d’être of insurance companies is to deal with EGS issues and climate change. If we look at history, it’s been shown that insurance was always present for big social and economic challenges. Today it’s more about planet earth,” he said.

For companies which are struggling to understand what they should be doing and keep pace with regulations, Bigel advises executives to get involved and follow EU publications on the developments.

He recommends that companies conduct a mapping exercise of legislations, verify the insurance products they’re selling, and verify the calendar of the various legislations coming into force. For companies that need external assistance there are many good players in the sector, added Bigel.

“There is a major point that people tend to forget—integrating ESG is not just an issue of wishful thinking or pious wishes, it’s a matter of competition and economic transition. The current economy will not last forever,” said Bigel, citing recent debates over gas and energy as a prime example of the changing economy.

“If we look into what the European Commission has stated in the last couple of years, you’ll see this transition to take into account ESG and embed it into various legal and compliance regulations. It’s also a matter of being more competitive and sustainable in the future. At the same time, it gives a real purpose to companies,” he concluded. https://www.intelligentinsurer.com/article/adding-the-s-to-esg-why-insurers-can-make-a-difference

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