Insurers had more than $9.5 trillion in cash and invested assets in 2020 (see Facts + Statistics: Industry Overview, Insurance Information Institute) and, like other firms managing investments, can drive environmental and social outcomes.

Insurers are unique in their position as underwriters of key risks. Insurers will be impacted by increased frequency and concentration of high-impact natural catastrophes, and the increase in weather related insurance claims. For example, many insurers are declining to underwrite insurance for properties that are a highly susceptible to climate risk, like beachfront homes in a hurricane zone.

Internal insurer operations impact the environment, involve social considerations and require governance. Insurers must consider their own operations when developing an ESG program and disclosures.

The Regulatory Landscape

European regulators and insurers have led the charge to create ESG standards. Many of these provisions require insurers to identify, monitor, and manage ESG risks posed to an insurer's investment and underwriting decisions and operations.

Within the United States, state governments have lead in requiring ESG reporting and disclosure and the federal government is following closely behind. Six states have required insurance companies to report climate change financial risk by responding to questions developed by the National Association of Insurance Commissioners (NAIC). Recently, New York and Connecticut have introduced proposed guidance, reporting requirements, and legislation. At the federal level, the Securities and Exchange Commission has been reviewing mandates for increased climate disclosure and evaluating possible ESG disclosures. The Federal Insurance Office has issued a request for information on climate-related financial risk in the insurance sector. The U.S. House of Representatives has developed ESG-related legislation that is unlikely to become law but establishes a possible framework for future bills.

In 2010, the NAIC released a set of eight survey questions regarding climate change financial risk. Now six states—California, Connecticut, Minnesota, New Mexico, New York and Washington—require insurance companies that write $100 million or more in policies in those states to report climate change financial risk information. Reporting companies make up approximately 70% of the national insurance market by direct premiums paid. Although not widely reported, the information is publicly available. See Assessment of and Insights from NAIC Climate Risk Disclosure Data, NAIC Center for Policy and Research, November 2020 (last visited Oct. 4, 2021).

In March 2021, New York Department of Financial Services (NYDFS) introduced proposed guidance to its New York incorporated insurers for managing climate related financial risks. The guidance covers the proportionality of the approach, the materiality of the risks or exposure, governance and organizational structure, business models and strategy, risk management, scenario analysis, and public disclosure. Proposed Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change, New York Department of Financial Services, 1, 2-5 (2021). The guidance provides that all insurers should publicly disclose how climate risks are integrated into their corporate governance and risk management, including the processes used to assess whether these risks are considered material. Id. at 6-8. Under the guidance, disclosures should go beyond describing operational issues and address how physical and transition risks (including liability risks) might impact insurers' underwriting, investment, and strategies. Id. at 8-15.

Connecticut has enacted the first climate-related risk legislation applicable to insurance companies in the United States. Connecticut's law requires the Connecticut Insurance Commissioner to submit a report on Connecticut Insurance Department's progress toward addressing climate risks to the joint standing committee of the General Assembly. SB 1202 §346. The reporting areas include, risk based capital requirements, regular supervisory examinations, and risk and solvency assessments. Id. Additionally, the report will incorporate Connecticut's greenhouse gas emissions reduction levels, as set forth in §22a-220a of Connecticut's general statutes into the Insurance Department's regulatory and supervisory actions. Id. This will grant the Connecticut Insurance Commissioner the ability to require all Connecticut Insurers to comply with §22a-220a and in turn, report on the Connecticut insurance industry's progress in reducing greenhouse gas emissions using established metrics. Section 346 also requires the report to address the impact of critical climate risks, like the thermal coal, tar sands and Arctic oil and gas on the insurance sector and include supervisory and regulatory actions that bolster the resilience of insurers to climate change's physical impacts. Id.

The SEC has sought public comment on a set of questions on expanding climate ‎change disclosure. Commissioner Allison Lee Herron, Public Input Welcomed on Climate Change Disclosures, U.S. Securities and Exchange Commission (Oct. 8, 2020). In December 2020, the ESG Subcommittee of the SEC Asset Management ‎Advisory Committee issued a preliminary recommendation that the SEC adopt standards by ‎which public companies would disclose ESG risks. Id. Commissioner Allison Herren Lee has ‎reportedly stated that the SEC would propose expanded climate disclosure requirements by the ‎end of this year.‎ Id.

The day that the SEC comment period closed, the U.S. House of Representative's passed the Corporate Governance Improvement and ‎Investor Protection Act (the Act). H.R. 1187. The act introduced five measures designed to increase public ‎company disclosures. These metrics include requiring public companies to disclose the link between their ‎environmental, social and governance metrics and their long term business strategy. Id. Additionally, the Act creates a Sustainable Finance Advisory ‎Committee to the SEC which would recommend ‎policy changes to facilitate capital flow toward environmentally sustainable investments. Id. Finally, the ‎Act would require public companies to assess risks associated with ‎climate change and describe the metrics they use to evaluate ‎and disclose such risks to investors.‎ Id. The Act passed with no Republican votes and is likely to die in the Senate but it does establish a framework for potential legislation.

Insurer Actions

Many insurers are disclosing key ESG elements, such as climate change risk, using one of the many available voluntary disclosure standards. Many Insurers have developed their own ESG reporting metrics and systems while waiting for formal regulations to be proposed. Companies like the Allstate, State Farm and Progressive have all created and used their own metrics for measuring ESG and have made yearly progress reports available to the public.

Legal Pitfalls and How To Avoid Them

In developing ESG disclosures, greenwashing should be a major concern for any insurer. Green washing is "disinformation disseminated by an organization so as to present an environmentally responsible public image." Greenwash, Lexico powered by Oxford Dictionaries, 2021. The performance of insurance companies will be measured against whatever ESG disclosures they report.

Further, insurer's will have to ensure that everything they report in their own ESG reports and eventually to the government is true. There could also be a rise in disclosure related sanctions and hearings as the federal and state governments more closely scrutinize insurer's ESG reports.

To avoid green washing or other disclosure issues, insurance companies should strongly consider developing an ESG policy and program to develop disclosures. An ESG policy is a written document or approach to enterprise-wide ESG. An ESG program consists of the management tools, metrics and reporting mechanisms that implement the policy and undergird any ESG disclosures.

Andrew Otis is a partner and Brittany Batts is an associate at Locke Lord.