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Article | Insurance Regulators Corner

ESG: what is it and why it’s important to stakeholders

ESG stands for environment, social and governance and is comprised of non-financial factors considered in the investment decision making and corporate strategy development processes, among others. Although not necessarily a new concept, ESG is becoming a phenomenon and focal point of corporations operating in a fiscally responsible manner. ESG centers around socially responsible investing, as a defining theme for corporation’s investment portfolios that can significantly impact long-term investment returns, and business operations that support representation within and access for people of color.

The components of ESG focus on multiple overarching factors. Environmental factors are positioned around conservation of the natural world to include climate change, natural resources, air and water pollution, and environmental opportunities. Social factors consider people and relationships and center around human capital, product liability, stakeholder opposition such as community relations and controversial sourcing and social opportunities. Governance establishes standards for operating a company and includes corporate governance, corporate behavior, and governance opportunities.

So why is ESG such a hot topic now? Stockholders and stakeholders, such as regulators, have a vested interest in a corporation’s investing in a manner that supports sustainability. Consumers and employees expect businesses to do more, be responsible regarding ESG, and want to do business with and work for companies that support issues they care about. In 2020, powerful and complex disruptors such as the global pandemic, widespread civil unrest, a highly contested presidential election, and unconstrained climate change emerged; however, the underlying issues did not develop overnight. Rather, these disruptors tended to highlight and amplify long-standing inequities and issues in the U.S. and worldwide.

In response, the National Association of Insurance Commissioners (NAIC) established a task force and a special committee under the Executive (EX) Committee to address ESG issues within insurance; (1) Climate and Resiliency (EX) Task Force, and (2) Special (EX) Committee on Race and Insurance.

The Climate and Resiliency (EX) Task Force was established to serve as the coordinating NAIC body for discussion and engagement on climate-related risk and resiliency issues, including dialogue among state insurance regulators, industry, and other stakeholders. Specific charges for 2022 include:

  • Consider appropriate climate risk disclosures within the insurance sector
  • Evaluate financial regulatory approaches to climate risk and resiliency in coordination with other committees, task forces, and working groups; specifically, the Financial Condition (E) Committee and the Financial Stability (EX) Task Force
  • Consider innovative insurer solutions to climate risk and resiliency including evaluating application of technology and innovation to mitigate natural disasters and products designed to mitigate, manage, and close the protection gap
  • Identify sustainability, resilience and mitigation issues and solutions related to the insurance industry
  • Consider pre-disaster mitigation and resiliency and the role of state insurance regulators in resiliency

The Special (EX) Committee on Race and Insurance serves as NAIC’s coordinating body on identifying issues related to (1) race, diversity, and inclusion within the insurance sector, (2) race, diversity, and inclusion in access to the insurance sector and insurance products, and (3) practices within the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups. Specific commitments of this special committee include:

  • Serve NAIC in accomplishing the mission of the committee
  • Coordinate with existing committees, task forces and working groups; specifically Big Data and Artificial Intelligence (EX) Working Group and Casualty Actuarial and Statistical (C) Task Force to encourage and support their work on issues affecting people of color and underrepresented groups included in the business of insurance using artificial intelligence
  • Continue research and analysis to identify specific issues and develop recommendations on action steps for regulators and companies to improve industry level diversity and inclusion
  • Receive reports on NAIC diversity, equity, and inclusion (DE&I) efforts, communicate the results to states and coordinate state requests for DE&I related assistance
  • Research best practices among state insurance departments on DE&I efforts and develop forums for sharing
  • Analyze insurance, legal and regulatory approaches to addressing unfair discrimination, disparate treatment, proxy discrimination and disparate impact in underwriting variables and data
  • Consider enhanced data reporting and record-keeping requirements across product lines to identify race and other sociodemographic factors of insureds
  • Analyze insurance access and affordability issues

Establishing task forces and committees and assigning the specific charges and commitments demonstrates the significance of ESG issues within the insurance industry. Recognition of the pervasiveness of these issues, emphasis on a collective effort by insurers and regulators to identify, assess and mitigate these issues, and the need for extensive data and analysis to be effective are paramount in the pursuit of addressing ESG concerns within insurance.  

In what ways has your state insurance department integrated managing ESG risks into the analysis of the investment portfolio, strategies and corporate governance? How have companies regulated by your state been proactive in identifying, assessing, and mitigating ESG risks within their insurance operations?  

Stay tuned for more in our series on the importance of ESG, the ABC’s of ESG, and how it impacts an enterprise’s investment portfolio and other corporate decision-making processes; including underwriting decisions, using data and AI to accelerate underwriting, and ensuring affordability and accessibility of insurance to communities of color and underrepresented groups. 

To learn more about ESG and why regulators are also becoming more concerned with the prevalence of Private Equity in insurance, watch our webinar.

For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.

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