There are concerns around developments in the Americas and in the US specifically. Regulations are fewer, less prescriptive and developing more slowly than those in the EU.¹³ The fragmented regulatory landscape in the US, with differences among states, adds further complication. Banks and asset managers find themselves caught in the middle of political polarization in the US, with “red-state” regulators seeking to ban those allocating assets into green funds and “blue-state” authorities seeking to ban brown assets from their investment portfolios. Until these tensions are resolved, ESG reporting will remain complex and expensive, and industry efforts to establish standards across multiple jurisdictions will be difficult and time-consuming.
4. Clear ESG strategies and high-quality disclosures are the key to improving ESG scores.
By looking at last year’s biggest winners and losers in the MSCI and S&P indices, we can draw some conclusions about how insurers can improve and protect their rankings. Our analysis shows that clear communication around priorities and certain actions correlate with rising scores. The key moves include:
- Retooling corporate governance in line with ESG commitments
- Publishing ESG reports with more detailed information
- Outlining principles for financial inclusion and responsible investing
- Investing in human capital development
Interestingly, some insurers with improved S&P ESG scores in 2021 excelled mainly in the social and governance dimensions. Others made leaps based on environmental programs and commitments. Moving the needle in one area helps the overall score. The opposite is also true; poor data availability and weak public reporting on social and governance factors led to a dramatic decrease in the S&P rating of one prominent US-based insurer, despite its clear focus on the physical impact of climate change.
Rating agencies seem to be taking more holistic views and expect tangible action and detailed information on all three ESG fronts. The scoring process, which in years past was largely driven by “G,” has clearly evolved.
5. Lack of transparency and varying data standards invite greater regulatory scrutiny and standardization.
Significant divergence of ratings and scores remains a major issue for both investors and insurance CEOs. Some companies are rated at opposite ends of the scale by different agencies, and there are examples of divergent movements, thanks to varying interpretations of ESG performance. Because of the complexity of the issue, the situation has not improved much during the last year.
Research¹⁴ into the divergence in ratings has found that rating providers typically:
- Select varying sets of attributes (scope)
- Adopt different measurement methodologies
- Assign different weights when determining ESG ratings
While the adoption of a common taxonomy will enable better control over scope-induced differences, the biggest driver of divergence is how certain attributes are measured based on available indicators. Because of the difficulty in fixing those measures, the divergence lingers.¹⁵ While weight difference is easier to address, it is also a moving target, as agencies are evolving their methodologies to make them more sector-specific.
Our research revealed specific variances, including:
- Changes to weightings: The environmental dimension gained 6% points in 2022 through the addition of decarbonization strategies as a new component; the governance dimensions received less weighting
- New questions: Compared to previous questionnaires, several questions were added or reformulated, for example in Climate Risk Adaptation (CRA) or Workforce Management criteria
Data underlies every ESG rating methodology and the ESG data market keeps maturing. Self-reported data is now under more scrutiny, largely due to the risk of greenwashing. There is plenty of room for regulators to enforce standardized ESG metrics and for companies to improve their disclosure practices. The World Economic Forum, in collaboration with EY and the other Big Four accountancies, has developed a set of universal ESG metrics aimed at improving non-financial disclosures.¹⁶
The transparency of agencies is another pain point for both investors and regulators. A recent publication from the European Securities and Market Authority (ESMA) concluded that there is insufficient transparency on ESG considerations by credit rating agencies,¹⁷ as disclosures differed significantly across rating agencies and ESG factors.
Regulation needs to evolve in ways that allow for unique methodologies but also protect investors by increasing transparency. The International Regulatory Strategy Group (IRSG) has identified potential conflicts of interest and how payment structures can be revised to address these issues. ESMA is currently investigating the use of ESG ratings by market participants and consulting with market stakeholders on how the market functions today.¹⁸
In general, regulatory oversight is expected to increase. In fact, ESG legislation progressed in 2022 in Europe, the US and the UK. Ideally, different countries and jurisdictions will take a harmonized approach, applying consistent taxonomies globally and adopting similar principles with room for regional tailoring.¹⁹