Principles and priorities: re/insurers tackling the challenge of ESG

If you want to know why re/insurers haven’t made more progress incorporating environmental, social and corporate governance (ESG) issues into investments and underwriting, Gerald Chen-Young may have the answer.

As he put it: “In Jamaica, we have a saying that there is no need to make the bed when the house is on fire.”

Chen-Young was born in Washington DC but raised in the Caribbean. Today he is principal at GCY Associates, a specialist in global institutional investment management, consulting and advisory. Its chief investment officer, he also serves on various boards, including those of insurers and the US National Public Pension Fund Association.

He joined Intelligentinsurer.com to discuss ESG in insurers’ investments and underwriting, along with Jessica Botelho-Young, associate director of analytics at AM Best; and Dan Topping, chief investments officer at BP Marsh.

Chen-Young’s point was not that ESG is not important. Rather, he argues, at least some of the slow progress in implementing ESG considerations is down to simple pragmatism.

“Despite your best intentions to be anti-tobacco or whatever, when things get to the crunch, we have to survive,” he explained. “We are custodians of the planet on one hand, but on the other hand, we’re creatures of the planet, too.”

Timing is everything

Re/insurers are hardly unique in taking this approach. The war in Ukraine and the renewed pressure to look at domestic gas or other fossil fuel supplies have shown the tensions between competing priorities.

“There’s abhorrence across the board over what Russia has done and also concurrence in the belief in ESG. Yet, I’m reasonably sure all of us have considered opening the spigots here in North America to resolve the oil and gas issue that Russia poses to continental Europe. ESG has certain practical restrictions, limitations and shortcomings,” Chen-Young said.

For investments, those restrictions often concern how fast re/insurers can sensibly move to align exposures with ESG ideals. Whether there’s an inherent conflict between maximising returns and incorporating ESG policies is essentially a question of timing, according to Topping.

“I suspect it’s down to the time frame for integration,” he said. “If you want to do it immediately, then that would be quite a bit of a shock to the system.”

From this point of view, Topping welcomes Lloyd’s market guidance on establishing an ESG framework, published in October 2021. Its Sustainability Transparency and Reporting regime will be implemented from 2023 onwards, giving some “breathing space” for companies. That does not change the direction of travel, though, and change will still come fairly rapidly, he predicts.

“Personally, I don’t think it will be called ESG investing in five years; it will just be ‘investing’.”

Risk and opportunity

On underwriting, progress in incorporating ESG considerations into decisions so that certain sectors are excluded from coverage, for example, is less developed. That’s understandable, according to Topping.

The challenge is dealing with “unpopular truths”—reconciling, for example, the “short-term necessities to get the long-term movement towards net zero”. While the goal may be to move to renewable sources, traditional oil and gas businesses will still require coverage (and funding) while the world remains reliant on them.

“Ultimately, with insuring and investing, you want to be creative and not destructive,” he said. “If you go too far, it could be destructive to turn off those things which have a negative impact but unfortunately are a necessity.”

According to Botelho-Young, this is a question not just of practicality but also equity.

“This is meant to be an equitable transition. We won’t see coal mines in South Africa closing tomorrow because that’s not equitable; it’s not what the world needs and certainly not what South Africa needs,” she said.

“We can support a transition but also make sure we’re bringing everyone along with us and not disadvantaging those who don’t deserve it.”

In the longer term, it is important to remember that ESG is not solely about restrictions and managing risks but also about opportunities.

“It gives players the opportunity to create and develop new products,” said Botelho-Young.

“With this transition from a high to low carbon economy, we might see new insurance products to support the renewable energy sector—things such as wind farms, solar farms and also electric vehicles,” she said.

Here, again, Lloyd’s may have it right. As its CEO told reporters during the COP26 UN Climate Change Conference in November 2021: “Climate change may be the ultimate systemic risk, but it is also the biggest single opportunity the insurance industry has ever seen.”