Peak Re, a global reinsurer based in Hong Kong, has been navigating the intricate landscape of environmental, social, and governance (ESG) considerations. While ESG has gained significant attention in recent years, the industry grapples with a lack of consistent standards and measurements. Peak Re has observed that within the realms of ESG, environmental aspects bear the greatest relevance, followed by social factors, while governance aspects receive less attention. Recognising the need for standards, the organisation highlights the existence of various frameworks, such as those provided by the United Nations and the ISO. Moreover, an abundance of rating agencies has emerged, creating a billion-dollar business focused on ESG ratings and data.
In 2018, the ESG rating market witnessed an astonishing number of over 600 ratings globally. However, consolidation, mergers, acquisitions, and market exits have reduced the number to approximately 60 today. Nevertheless, the lack of consistency in ratings remains a challenge, with major differences observed among top companies. For instance, Tesla’s ESG ratings vary significantly among different agencies, indicating the absence of standardised evaluation criteria. This inconsistency hampers the ability to make informed judgments based on ESG ratings.
Peak Re explores the underwriting restrictions imposed by reinsurers in terms of ESG. While direct and effective business receives more attention, treaty underwriting poses challenges due to the lack of standardised measurements. Though reinsurers increasingly inquire about ESG considerations during renewals, making concrete decisions based on evolving measurements remains difficult. The absence of a universally applicable framework hinders the establishment of strict treaty restrictions, although insurers with ESG-friendly portfolios may have clearer guidelines.
Climate-related issues dominate the discussions surrounding ESG restrictions in the insurance industry. The consensus among reinsurers leans toward ceasing the underwriting of new businesses related to thermal coal, coal mining, and coal power plants. However, a pragmatic approach prevails concerning existing projects, as abrupt cessation may not be feasible or socially responsible. Many reinsurers opt for a phased-out approach, with target dates ranging from 2030 to 2040. Social considerations, such as diversity and inclusion, vary among reinsurers, with no consensus on restrictions related to controversial industries like weapons, tobacco, and casinos.
Rather than focusing solely on restrictions, reinsurers are also exploring ESG-friendly initiatives. Peak Re highlights the growing support for renewable energy projects, particularly offshore wind turbines. Initially considered high-risk and unattractive, significant investment in research and risk mitigation has made such projects viable. These endeavours showcase the industry’s proactive approach in supporting ESG initiatives and finding solutions to previously challenging risks.
Regulatory scrutiny is increasing, with regulators worldwide demanding greater transparency and disclosures regarding ESG considerations. Financial institutions and insurance companies are required to conduct scenario tests for extreme climate events, and forthcoming regulations will necessitate the disclosure of emissions from both companies and their suppliers. Greenwashing, the deceptive practice of presenting an organisation as environmentally friendly without substantiating claims, faces heightened scrutiny, leading to more stringent punishments.
The path towards achieving standardised measurements and consistent ESG ratings in the insurance industry remains uncertain. Peak Re acknowledges the importance of clear regulations, enhanced standards, and internationally agreed-upon frameworks to facilitate industry-wide consistency. Despite the challenges, the organisation expresses optimism for the future, where increased scrutiny and regulation will address greenwashing concerns and promote sustainable practices. The timeline for achieving these goals depends on the collective efforts of regulators, rating agencies, reinsurers, and the industry as a whole.
