Environmental, Social, and Governance (ESG) investing has been experiencing consistent growth since its inception in 2006. The pandemic further accelerated the demand for ESG investing among the younger generation of investors, who are more concerned about the effects of their investment decisions on environmental and social issues.
Many people – including those in the insurance industry – are skeptical with respect to the value and fairness of the ESG reporting initiative. But an enormous number of voices, backed by political will, are demanding action and change from organizations on this front.
One of the first steps in attempting to create a framework around ESG goes back to 2015 when the Task Force on Climate-Related Financial Disclosure (TCFD) was established by the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system. However, TCFD’s focus was limited to climate as it emerged as the most urgent and material focus for environmental disclosures. Other issues, although significant, fall outside of TCFD’s scope.
The IFRS Foundation took the next step in 2021 by creating a new standard-setting body – International Sustainability Standard Board (ISSB), and incorporating TCFD’s recommendations into ISSB’s framework, which is expected to come out in early 2023.
Also, in 2021, the SEC created the Climate and ESG Task Force under the division of enforcement, signaling the Commission’s belief that false and misleading statements were being made about ESG investments and funds. Around the same time, the SEC proposed rules requiring information about climate-related risks that are likely to have a material impact on business results and financial condition. The required disclosures follow the TCFD principles, and they include compulsory disclosure in the notes to the financial statements.
In April 2022, the NAIC adopted a report that aligns with the TCFD. The revised TCFD-styled disclosures were due to regulators in November 2022. The current threshold for participation in the survey is $100 million in premium. These surveys are available on the California Department of Insurance website. Some companies submitted TCFD-styled reports as early as 2020. At least 26 such reports covering 293 insurance companies – mostly larger international insurance groups – can be found on the website. The trend is clearly moving to more ESG reporting by more companies at all size levels within the industry.
In summary, ESG reporting is primarily an exercise in evaluating changing levels of risk based on environmental, social, and governance practices, quantifying the risks and disclosing them to investors, employees, customers, bankers, and other stakeholders.
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