Insurers' factoring of environmental, social and governance considerations into underwriting and investment decisions is "not just PR" but "something they really are taking seriously," a Moody's analyst said May 23.
Speaking to journalists ahead of the May 24 launch of Moody's first survey of European insurers' and reinsurers' stances on ESG, Moody's senior credit officer Brandan Holmes acknowledged that ESG efforts were a marketing exercise "for a number of years and maybe for a number of companies it still is that."
But he added: "When we meet with companies and they show us how it is embedded in their risk management frameworks on the underwriting side, not just the investment side, [it demonstrates] it is something they really are taking seriously.
"For someone like Swiss Re to move to an ESG benchmark for their entire portfolio, that is not just PR; that is a real belief that over the longer term, they expect better risk-adjusted returns because they think there is less volatility in that ESG portfolio than in the broader portfolio."
Swiss Re said in July 2017 that it would shift its entire $130 billion portfolio of liquid assets to track ESG-integrated indexes.
Treading carefully
However, Holmes also said insurers should tread carefully when withdrawing insurance cover to carbon-intensive industries, as several of Europe's largest have done recently. France's Axa, for example, said in December 2017 that it was phasing out insurance coverage for new coal construction projects and oil sands businesses, while Allianz Group said May 4 that it would withdraw from insuring operating and planned single coal-fired power plants and coal mines.
Holmes warned that an ESG-savvy insurer might make a big show of withdrawing from a carbon-intensive company, but in so doing lose the business to a rival less inclined to push for change at a company otherwise motivated to go for it.
"As long as the large companies who have an ESG focus and agenda continue engaging with those companies who are open to reducing their carbon footprint, they can help effect change. It is a very nuanced approach," Holmes said.
Moody's associate managing director Antonello Aquino added that bigger companies were sharing ESG research widely within the industry to ensure that they were able to set adequate prices for insuring climate-affected risks. Individual ESG-savvy companies would render themselves noncompetitive if they increased prices out of kilter with the rest of the market, he said.
Aquino said: "What we see is that large institutions are more willing to share knowledge about how the environmental and climate change may affect risks with the rest of the industry rather than maintaining this as proprietary information. If it is just them thinking about this risk in the long term, they may not be able to reflect this in their prices."
Underwriting impact
The Moody's ESG survey of 15 insurers, including the largest European groups, found that 94% believe that ESG is an important business consideration. Holmes said this was "a bit higher than I expected." Some 53% of insurers indicated that ESG was a strategic focus, while 41% said it was important but not a strategic focus.
The survey also found that 77% of the insurers surveyed expect ESG issues to have at least a moderately adverse impact on underwriting risk, and that the biggest ESG issues affecting underwriting risk are climate change and population aging.
In addition, 60% thought that ESG would lead to a moderate increase in business opportunities in the next five years, with Moody's citing areas including insurance for renewable energy facilities.
Holmes said the opportunities from ESG are "small-ish right now but clearly gathering momentum as ESG becomes more important in the broader market."
