Among the plethora of announcements and discussions at COP26 in Glasgow, U.K., one of the main takeaways for the international insurance industry, including the U.S., was the consensus on how important the industry’s role will be as the world tackles climate change.
Whether it is by decarbonizing their own operations and their underwriting and investment portfolios, or by helping communities build resilience and adaptation through climate-related risk solutions and data analytics, insurers are going to have an important part to play in the effort to address the overriding global challenge of our time. Willis Towers Watson’s launch of the Climate Transition Pathway earlier this year, the Climate Transition Index in October and the Global Resilience Index Initiative that was unveiled in Glasgow during COP26 demonstrates some of the ways we are looking to help insurers step up to the plate.
Although some outcomes at COP26 did not meet expectations, while others exceeded them, I think we can safely say that the impetus for action has intensified – which now must be transferred into actual actions. Among the important announcements made by participating countries, alongside cross-country commitments on sustainable infrastructure development, methane, deforestation and limiting overseas oil and gas investment, were the U.K.’s goal of becoming the first net zero aligned financial system, and a surprising, but welcome, one from the U.S. and China on planning to work together on cutting greenhouse gas emissions in the next decade. This was a further sign of the U.S. re-engaging in efforts to tackle climate change.
After taking office in January 2021, President Biden has shown a focused intent on climate and wider environmental, social and governance (ESG) policy, with initiatives such as his Executive Order on Climate-Related Financial Risk adding weight to the Climate Risk Disclosure Act and the ESG Disclosure Simplification Act bills currently with Congress. Even if one or both bills do not make it into law, they are certainly setting a tone for regulators and state administrations that leaves plenty of room for policymakers and regulators (including those overseeing insurance) at both federal and state levels to accelerate the race to net zero and the transition toward a sustainable financial system.
Already, we see that the Security Exchange Commission’s (SEC) Climate and ESG Task Force, which was created in March, is developing initiatives to proactively identify ESG-related misconduct. The SEC recently closed the comment period on its request for input on the scope and approach to ESG disclosure rules. Furthermore, it is expected to propose its climate disclosure requirements by the end of 2021.
Moreover, on August 31, 2021, the Federal Insurance Office (FIO) gave notice that it will cooperate with international and state insurance commissioners on the development of a U.S. climate change regulatory framework with three main goals:
We can observe similar stories at the state level.
The state of California is leading the way by putting insurers on the front line of resilience through measures such as:
In New York, the Department for Financial Services recently released its final guidance that sets out expectations that all New York insurers start integrating the consideration of the financial risks from climate change into their governance frameworks, risk management processes, scenario analysis and business strategies, and that they develop their approach to climate-related financial disclosure.
Other states currently pursuing a similar legislative or regulatory line of thought as New York include Connecticut and Vermont. Likewise, Illinois and Maine have introduced legislation mandating more responsible investment policies, and Washington has developed an ESG investment reporting framework.
There are currently a lot of moving parts in the U.S. insurance regulatory landscape with respect to ESG requirements that, together with international trends, could be predictive of an increasingly demanding regulatory environment across the country.
Hence, we would expect (and recommend) U.S. insurers to review and strengthen their ESG policies, and it is in their interest to do so – not only to prepare for an evolving regulatory landscape, but also to support the achievement of strategic objectives and their underlying decision-making processes.
As time goes on there might be no room for companies to sit on the sidelines.
