ESG and insurance: The new Western Silk Road

To this end, the new regulation imposes several obligations on insurance companies offering insurance-based investment products. Among others, insurers must disclose how they integrate ESG risks in their investment decisions, both on their websites and in pre-contractual information. They must also produce regular reports on the ESG features of the products and state whether adverse impacts of investment decisions on ESG factors are taken into account or why not. Besides complying with the standard, the adoption of relevant ESG internal policies has also become an essential factor in achieving sustainability and good governance. It is not enough to offer ESG-compliant products. These same essential principles must also be promoted internally. For example, several insurance companies are trying to reduce their carbon footprint as much as possible by encouraging virtual meetings and reducing air travel.

Even though Regulation (EU) 2019/2088 already establishes the obligation to include information on ESG factors in remuneration policies, some financial institutions are going further by starting to link remuneration to the achievement of social, organisational, or environmentally sustainable objectives[1].

Sustainability is part of insurance companies' risks and opportunities not only because it is a focus of interest for their stakeholders but also as an external factor that affects their risk models. It is, therefore, necessary to integrate ESG metrics into policies and company strategies. It is also recommended that companies analyse the impact on labour rights, transparency for the end consumer, the environment, privacy and data security

Lastly, a word of caution. It is necessary to warn against "greenwashing" – the process of conveying a false impression or providing misleading information to make a company’s products seem more environmentally sound. The cost of association with such businesses could be high for insurers, particularly as regulators are expected to crack down harder on this practice. In addition, regulated businesses such as those in the insurance industry need to give detailed consideration on how they will comply with relevant reporting requirements. While associating with businesses investing in ESG has clear benefits, associating with businesses who are “greenwashing” might lead to difficult questions from regulators and in turn reputational damage for insurers so it is important to be cautious.

One thing is clear - with growing consumer expectations, ESG is becoming increasingly important for businesses and insurers alike. It can drive business opportunities, boost reputation and profile, affect balance sheet performance, and impact insurers’ relationships with policyholders, shareholders, and the communities in which they operate. ESG holds an enormous capacity for innovation and transformation for the insurance industry. The "what will people say" and power of public opinion traditionally associated with paralysing social censorship can be the driving force for change.

Pablo Muelas is a partner and Head of the Insurance and Reinsurance practice of Hogan Lovells in Madrid. He is widely recognized as a leading practitioner in the Spanish insurance industry.