What is ESG?

ESG stands for the integration of Environmental, Social and Governance factors into a company’s strategy, operating principles and procedures. It is essentially about mitigating risk and capitalising on opportunities to deliver long-term, sustainable growth.

Environmental – Carbon emissions, energy efficiency, hazardous waste management, recycled material use, clean technology
Social – Diversity and anti-discrimination programmes, working conditions, employee safety, fair trade products, human rights policy
Governance – Corporate Governance, corruption and instability, compensation disclosure, gender diversity of boards

What role does insurance have in enacting change?

The insurance industry effectively has three areas in which the actions of those operating within can impact ESG – own business operations, enabling or influencing those of its clients, and how it handles its own investments. António Guterres, the UN Secretary General, stated that with insurance companies controlling over USD35 trillion of assets under management, they play a key role in delivering change and is encouraging the insurance industry to align its portfolios and investments with net zero by 2050.

Lloyd’s position

Lloyd’s published their first ESG report in December 2020, with the aim to integrate sustainability into all Lloyd’s related business activities. The report sets out their plans to accelerate the transition to a more sustainable (re)insurance marketplace and builds on Lloyd’s existing ESG work with a comprehensive market-wide strategy that aligns with the United Nations’ Sustainable Development Goals and supports the principles set out in the Paris Agreement.

The report also highlights ongoing work to drive cultural change across the Lloyd’s market. This includes commitments to meaningful and measurable actions to build a more inclusive working environment such as establishing the Lloyd’s Culture Advisory Group and the setting gender and ethnicity targets from 2020 and 2021 respectively.

For the first time, Lloyd’s are setting publicly accountable targets for responsible underwriting and investment to help accelerate society’s transition from fossil fuel dependency, towards renewable energy sources. Lloyd’s will start to phase out insurance cover for, and investments in, thermal coal-fired power plants, thermal coal mines, oil sands, and new Arctic energy exploration activities, and from 1 January 2022, Lloyd’s managing agents will be asked to no longer provide new insurance coverages or investments in these activities. 

Acknowledging that the transition towards sustainable energy and business models may take certain clients some time, Lloyd’s have agreed to extend the deadline to phase out existing coverages for such companies to 1 January 2030. 

In addition to underwriting targets, Lloyd’s have committed to phasing out both the market’s and the Corporation’s existing investments in the same activities by the end of 2025. 

Lloyd’s ESG implementation timeline:

In addition, Lloyd’s recently released secondary report - ‘Insuring a sustainable, greener future’ - details its sustainability and decarbonisations ambitions of the sectors that are critical to a successful global transition to a low carbon economy (i.e. green industry, transport and energy), together with a climate action roadmap that highlights the ways in which the global insurance industry will support and accelerate this transition and the delivery mechanisms which will be deployed. This constitutes three main areas of action:

1. Pioneer new risk transfer solutions for green innovation
2. Support and accelerate the transition of carbon-intensive sectors
3. Harness USD30tn capital pool to drive positive change

Click here, to read the full report.

Impact on the marine liability sector

Given the marine industry’s large involvement in the mining and transportation of fossil fuels, the targets and enforced actions by Lloyd’s will impact those in the marine liability sector. Furthermore, with stakeholders and investors increasingly wanting their money invested in more sustainable greener initiatives, there is added pressure for insurers to minimise their exposure and reduce the capital deployed in this area.

Despite the first phasing starting in 2022, we are starting to see individual syndicates and companies taking action now with a broad refocusing of appetite and some taking a corporate decision not to support businesses involved with fossil fuels (i.e. thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities). 

Previously, these decisions were made on a deal-by-deal basis, however as part of their own ESG strategies, some insurers are now embedding their own environmental policies at a corporate level through a variety of approaches. These include measuring and monitoring their own environmental impact, reinvesting premium into certified green bonds and for some of the largest global insurers, redirecting capacity away from obligors that aren’t deemed to be making sufficient progress in reducing dependence on certain fossil fuels. As such, we are finding that the market for this type of exposure is reducing.

Lloyd’s equally wants to be at the forefront of innovation with respect to sustainability as evidenced by the Corporation’s ‘Jet Zero and Greener Maritime’ and ‘Offshore Wind’ commitments set out in the ‘Insuring a sustainable, greener future’ report.  With respect to the former, Lloyd’s want to ensure that cover is available to support the marine industries sustainability drive (technology, sources of fuel etc.) and emerging risks. In particular those associated with retrofitting of the global fleet to drive operational efficiency (i.e. the installation on-board ships of state-of-the-art or innovative components or systems). For clients involved in the ‘Offshore Wind’ industry, Lloyd’s are committed to expanding its coverage to ensure capacity constraints do not limit the growth of the industry.

Clients that are looking to deepen their involvement in the low carbon economy will benefit from Lloyd’s position and the underwriting room is perfectly placed to support the creation of such insurance solutions. 

What Miller can do to help

It is important to note that the above is in respect to the Lloyd’s ESG strategy and is not reflective of the global insurance market. Miller has access to over 100 marine liability reinsurance markets in every major global hub, enabling us to access to different appetites and obtain comprehensive insurance solutions for our clients. 

We welcome the opportunity to discuss this subject further and how the insurance market can offer additional help in developing innovative products to cover our clients’ entire portfolio of risk.