Ducks in a row: Bermuda grasps ESG

Bermudan re/insurers could excel in their attention to environmental, social, and corporate governance (ESG) factors, but they vary widely in their progress, Miqdaad Versi, head of ESG at insurance industry management consultancy Oxbow Partners, told a panel discussion at the Bermuda Risk Summit.

Oxbow has been commissioned by the Bermuda Business Development Agency to produce an ESG benchmarking report. So far, Oxbow has spoken to 20 of the 25 re/insurers it intends to survey on the Island, and plans to publish its report in time for the Bermuda Climate Risk Summit in May.

“The fundamentals of what re/insurance is all about—risk transfer—make this a very positive industry to invest in, but that’s not necessarily understood and appreciated by some of the ESG scoring teams,” Versi said.

“Who understands climate risk modelling better, when it comes to the physical risk side, than Bermuda’s re/insurers? We know the models are being adjusted when it comes to climate change, that there’s calibration happening year on year, and that there are changes when it comes to ideas and methodologies, for example for wildfires.”

Referring to Premier David Burt’s remarks at the Summit about the contribution international business makes to the local community, particular through education and employment, Versi said: “For those who are at an early stage of their journey in ESG reporting, just writing down what you are already doing is a far more positive story than is otherwise thought.”

There is “wide variability”, however, from those who have “not touched ESG at all” to those who are already planning “resilience, advocacy and how to make a real difference in a global context”.

Re/insurers “recognise the pragmatism” of the Bermuda Monetary Authority, but they say that it isn’t the regulator driving action on ESG, but investors.

Resilience and stewardship

“Over and above climate risk modelling, which is working, we’ve looked at the United Nations’ Principles for Responsible Investment. Also important are the UN’s Principles for Sustainable Insurance. The hardest area is resilience,” Versi said.

Resilience can mean, for example, the requirement to use building materials that are more adaptive to floods, but ESG requires more than underwriting “in a very singular way”, he added. Likewise with sector exclusions—such as not investing in thermal coal. Such an exclusion leads to the question for re/insurers of how this would impact the social side of ESG, when it could erode jobs in certain countries.

“There hasn’t been any re/insurer so far who has been able to take a stewardship approach, be proactive and understand that this is not just about exclusion but about transition,” Versi said.

Supporting the transition in the right way means asking insureds about their transition plans, such as moving away from thermal coal. It means having metrics to see what insureds are doing and before deciding to insure them, he noted.

That approach “has value” in moving the world to net zero, but most re/insurers are at the early stage of ESG action, with a focus on the environmental side, instead of looking at it as a whole.

ESG scoring teams largely focus on the operations of a business, but this is not a major way in which re/insurers are going to impact the wider world, he said.

That’s because most of them aren’t huge carbon emitters, although “a handful” are measuring their carbon footprint.

“Very few” are looking at their suppliers and asking them whether they are aligned with human rights policies because it may be that the impact they can have is “quite small”, he said.

Transparency

Most re/insurers are “outstanding” when it comes to governance—because good governance has always been central to their business—but the question remains how ESG itself is being governed. The most active on ESG will have a team involved to embed ESG across the whole business, Versi said.

The main challenge of ESG is disclosure, and most of the re/insurers surveyed “aren’t disclosing very much, if at all”. One way of disclosing progress with ESG in the climate space is reporting to the international Task Force on Climate-Related Financial Disclosures. This was created in 2015 by the Financial Stability Board to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.

“The fact there aren’t enough disclosures out there is a problem,” he said, because accountability needs transparency to be measured accurately. The EU, for example, is looking closely at not only the extent of the disclosures but also their quality.

“We don’t have disclosure and transparency on ESG from most re/insurers in Bermuda. We have a long way to go,” he said.