ESG & Insurance: Things to look out for in 2022
2021 will be remembered (or outright forgotten) for a variety of reasons. Indeed, in and amongst the pandemic-related doom and gloom, 2021 may be viewed as a watershed moment for all matters ESG – i.e. environmental (E), social (S) and governance (G) criteria, of course. The pace at which the regulatory landscape has changed over the past year in particular has been nothing short of unrelenting – with the implementation of the ‘Level 1 Disclosures’ found under the Sustainable Finance Disclosures Regulation (“SFDR”) meriting an honourable mention. Additionally, some much-needed, concrete action was also taken locally, with the launch of the much-anticipated Malta ESG Platform towards the latter end of the year providing the market with a number of useful metrics for the assessment of the ESG credentials of companies listed on the Malta Stock Exchange.
Early indications are showing that 2022 will keep pushing ESG to the forefront of board and shareholder meeting agendas the world over, and policymakers are naturally taking a commensurate approach. This article seeks to highlight a number of developments which are likely to be of interest to the various players operating in the insurance industry. By no means is it intended to provide an exhaustive list of ESG-related developments in the pipeline for 2022. This notwithstanding, the reader is encouraged to contact the author for any bespoke assistance which may be required.
Delay in applicability of the draft Regulatory Technical Standards (RTS) to 1 January 2023
Pursuant to a letter dated 25 November 2021, the European Commission officially informed the European Parliament and Council that the applicability of the regulatory technical standards pertaining to a select number of articles of the SFDR (the “SFDR RTS”) (which were originally published in two separate tranches in February and October 2021) would be deferred to the 1 January 2023 in order to further facilitate the transition process for the various stakeholders involved – including the product manufacturers and financial advisers, as well as the supervisory authorities themselves.
Despite the deferral of the applicability of the SFDR RTS, financial market participants and advisers under the SFDR (including, therefore, insurance undertakings making insurance-based investment products available to the public and/or insurance undertakings and intermediaries providing insurance advice in connection therewith) which consider the principal adverse impacts (“PAIs”) of their investment decisions and/or insurance advice on sustainability factors ought to be aware that they will be expected to comply with the disclosure requirements as found under the SFDR RTS by the 30 June 2023 for the reference period spanning 1 January 2022 to 31 December 2022. This therefore means that financial market participants and advisers considering PAIs will need to start collecting the necessary data required for these disclosures as at the 1 January 2022 regardless.
EU Taxonomy Climate Delegated Act
Purely by way of background, the EU Taxonomy Climate Delegated Act (Commission Delegated Regulation (EU) 2021/2139) (the “Climate Delegated Act”) provides the first set of technical screening criteria for defining economic activities which: (1) contribute substantially to climate change mitigation and climate change adaptation (these being the first two environmental objectives specified under the Taxonomy Regulation) and (2) cause no significant harm to any other environmental objectives set out under the Taxonomy Regulation.
The Climate Delegated Act entered into force on the 29 December 2021, with an application date as at the 1 January 2022. It will prove particularly useful in the context of the reporting required pursuant to Commission Delegated Regulation (EU) 2021/2178 – also known as the Disclosures Delegated Act (which supplements Article 8 of the Taxonomy Regulation). For more on what the Disclosures Delegated Act entails, the reader may wish to consult this article.
EIOPA Pilot Exercise on Climate Change Adaptation in Non-Life Underwriting and Pricing
In quite an interesting twist, the European Insurance and Occupational Pensions Authority (EIOPA) has launched a pilot exercise geared towards: (1) better understanding how insurers integrate climate-related adaptation measures in non-life insurance products, and (2) assessing the appropriateness of the prudential treatment of climate-related adaptation measures in the technical provisions and solvency capital requirements for non-life underwritings risks under Solvency II.
In its background considerations, EIOPA notes that climate change is expected to increase physical underwriting risk exposures in certain non-life insurance business lines; thereby potentially impairing the long-term affordability and availability of insurance products offering coverage against climate-related hazards. The pilot exercise is therefore expected to analyse the various ways and means through which climate-related adaptation measures could possibly mitigate this risk.
This is yet another indication of the permeating effect of sustainability on the insurance industry as a whole. It is now becoming increasingly more evident that the alarm bells which had been rung in the context of life insurance carriers (principally as a result of the regulatory implications of the SFDR) should now steadily start to extend to non-life insurance carriers as well. This reality had already been touched upon in a separate article published by this author towards the tail-end of last year. It would therefore be advisable for insurance operators to get ahead of the curve while they still can.