By: Lauren J. Dalton, Associate, Willkie Farr and Gallagher LLP
Insurance companies are facing growing demands from investors for information and transparency relating to the their “ESG” frameworks(1) “ESG” refers to three pillars of sustainability–environmental, social, and governance– that may be incorporated into an organization’s business practices and can serve as a proxy for its long-term profitability and success(2).
Investors have had a particular interest in the “environmental” pillar of companies’ ESG frameworks, with a strong emphasis on climate-related risks facing a business. This is because climate risk may have a two-fold impact on a company: losses may be directly incurred as a result of damage to physical property and infrastructure caused by extreme weather; and indirect financial impacts may also be felt, resulting from cost increases due to changes in climate policy, technology and consumer and market sentiment(3). In the insurance sector, these effects may be even more pronounced. Claims for climate-related losses underwritten by insurers may threaten their books of business or investment portfolios(4), and insurance markets can also be disrupted as insurance coverage becomes unavailable or unaffordable in certain geographical locations prone to wildfire, hurricane, or flood risk(5). Therefore, information on an insurance company’s climate risk exposure is critical for investors to make informed investment decisions and to appropriately price risk(6).
The National Association of Insurance Commissioners’ (the “NAIC”) Climate and Resiliency (EX) Task Force (the “CR Task Force”) has responded to investor demands for meaningful climate risk disclosures that provide high-quality, reliable, and verifiable information through the Insurer Climate Risk Disclosure Survey (the “Survey”)(7). The voluntary Survey, which is administered by the California Department of Insurance, aggregates data concerning how domestic insurance companies identify and manage climate-related risks. The Survey initially presented eight open-ended questions that asked insurers whether they had identified climate-related risks, developed policies with respect to managing such risks, and had taken steps to encourage the reduction of climate-induced losses(8). In 2022, the NAIC revised the survey to align it with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”). The TCFD standards represent the international benchmark of climate-related financial disclosures, and the Survey was accordingly revised to ask both open-ended and closed-ended questions focused on the TCFD’s four thematic areas(9) - governance, risk management, strategy for investment and metrics and targets that a company uses to manage risk(10). These thematic areas build out the framework that will help regulators understand how insurance companies are proactively addressing climate-related issues(11). The responses for the most recent survey, conducted for Reporting Year 2022, were due on August 31, 2023, and have since been posted on the California Department of Insurance’s website(12). Ultimately, the survey responses are intended to provide regulators, insurance companies, and interested members of the public with transparency about climate-related risks facing individual insurers and the industry as a whole.
For more information about the Survey, please visit: https://www.insurance.ca.gov/0250-insurers/0300-insurers/0100-applications/ClimateSurvey/
About the Author
Lauren J. Dalton is an associate at Willkie Farr and Gallagher LLP. Her practice focuses on merger and acquisition transactions in the insurance industry, complex reinsurance transactions and insurance regulatory matters. A special thanks to Efrem Berk who assisted with the research for this article as new associate at the firm.
Notes
[1] See Sandra Mathis and Craig Stedman, environmental, social and governance (ESG),https://www.techtarget.com/whatis/definition/environmental-social-and-governance-ESG, (last updated Mar. 2023).
[2] See Lucy Perez et al., Does ESG Really Matter- and Why? MCKINSEY QUARTERLY, Aug. 10, 2022, https://www.mckinsey.com/capabilities/sustainability/our-insights/does-esg-really-matter-and-why.
[3] See Pierpaolo Grippa et al., Climate Change and Financial Risk, INTERNATIONAL MONETARY FUND, December 2019, https://www.imf.org/en/Publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa.
[4] See Fredman, Alex, Regulators Should Identify and Mitigate Climate Risks in the Insurance Industry, THE CENTER FOR AMERICAN PROGRESS, June 13, 2022, https://www.americanprogress.org/article/regulators-should-identify-and-mitigate-climate-risks-in-the-insurance-industry/.
[5] See cf. id.
[6] See cf. Financial Stability Board, Recommendations of the Task Force on Climate Related Financial Disclosures, June 15, 2017, 42, https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf.
[7] Ceres, Climate Risk Management in the U.S. Insurance Sector, July 25, 2023, https://www.ceres.org/resources/reports/climate-risk-management-us-insurance-sector#:~:text=Key%20Findings,according%20to%20the%20TCFD%20recommendations; see also Ceres, Insurer Climate Risk Disclosure Survey Report & Scorecard, Oct. 20, 2016, https://www.ceres.org/resources/reports/insurer-climate-risk-disclosure-survey-report-scorecard (The 2016 report is critical of insurers’ degree of disclosure for climate disclosure risks, while the 2023 report finds that the insurers’ disclosures have become more comprehensive and in line with the since revamped survey’s recommendations).
[8] See Insurer Climate Risk Disclosure Survey, CAL. DPT. INS.
[9] See Redesigned State Climate Risk Disclosure Survey, CAL. DPT. INS., March 11, 2022, https://www.insurance.ca.gov/0250-insurers/0300-insurers/0100-applications/ClimateSurvey/upload/2022RevisedStateClimateRiskSurvey.pdf
[10] Financial Stability Board, Recommendations of the Task Force on Climate related Financial Disclosures, June 15, 2017, https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf.
[11] See id.
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