A new Best's Commentary, "Rejoining Paris Agreement Spurs US (Re)insurers' ESG Adoption", sets out some of the potential short-to-medium term impacts on the (re)insurance industry as a result of the US rejoining the Paris Agreement, including reputational challenges, as well as the threats and opportunities presented by the transition from a high to low-carbon economy.
The US rejoining of the Paris Agreement will take place on February 19, 2021 and the decision came immediately after The US President, Joseph R. Biden was elected and shows that the new administration is more interested in regard to the changing climate trends.
AM Best believes that an increased legislative and regulatory emphasis on climate risk will prompt US (re)insurers to accelerate their environmental, social and governance efforts. In Europe and Asia Pacific, in particular - (re)insurers have been increasing the integration of ESG factors into their investment and underwriting activities. They recognize the importance of ESG factors to the long-term viability of their businesses, although they are at different stages of their ESG journey.
According to a special report issued by Am Best across European and Asia Pacific insurers shows that the most relevant ESG issues the insurance industry faced with are: corporate governance, product liability including cyber security, and climate risk.
European Commission's technical expert group on sustainable finance has been working on formulating a standardised taxonomy for sustainable activities, EU Green Bond Standard, and climate disclosure guidance.
However, there has been a perception that US (re)insurers have lagged behind their global counterparts on the integration of ESG factors into their investment. So, as per AM Best, the concerns about exposure to climate risk, as well as reputational risk, are likely to persuade a growing number of US (re)insurers to consider ESG factors in their investing and underwriting activities, as the new US administration encourages the development of sustainability regulations and projects.
The Paris Agreement is a legally binding international treaty on climate change. The agreement was adopted by 194 countries in December 2015 and entered into force on 4 November 2016. The primary goal of it is to keep the global temperature rise this century well below 2℃ above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5℃. In addition, the agreement aims to strengthen the global response to the threat of climate change.
An increase in green infrastructure, including solar and wind parks and levees/floodgates to improve flooding resilience shuld be the results of the efforts made in order to support the tranisition to a low-carbon economy and to sustain the US climate targets under the Paris Agreement.
Although some of these new technologies may require (re)insurers to redesign their product offering to take into account new risks, these projects represent significant opportunities for (re)insurers that can embrace the shift and tailor their products accordingly.