The EU’s sustainability drive is noble, but insurers need support and clarity

Peddler of death sticks boil and bake, fossil-fuelled power group in the cake; fast-fashion firm with supply chain woes, arms maker in the cauldron goes.

A typical selection of “unethical” companies evokes a modern-day potion worthy of the witches in Macbeth.

And given the capacity companies have to poison as well as nourish, many investors are rightfully giving careful consideration as to what they concoct.

European insurers have been mindful of environmental, social and governance (ESG) considerations for many years and North America is catching up. In BlackRock’s 2018 insurance report just over two thirds of respondents in North American made ESG a high priority, as did more than 90 percent in Europe.

But the European Commission’s work to build sustainability into its financial policy framework – driven by the clear need to tackle climate change – takes ESG to another level.

New regulations, updates to Solvency II and the Insurance Distribution Directive and stress testing are among the arsenal for its campaign, and some of the rules have popped out of the legislative sausage-maker uncharacteristically swiftly. 

Stricter disclosure regulation on sustainable investments and sustainability risks have cleared the last major hurdle. Measures that embed ESG considerations into insurance distribution, underwriting and into carriers’ prudential requirements will follow, as will climate-related disclosure requirements within large companies’ non-financial reporting obligations.

Insurers were previously doing quite nicely promoting ESG via stewardship and shareholder influence.

And Insurance Europe calculates that European insurers have committed to plough well over EUR50bn ($55.8bn) into sustainable investments between 2018 and 2020.

But with the new framework, Brussels is putting too much impetus on insurers to right every environmental wrong.

This includes pressure on carriers not to insure or invest in certain energy sectors before alternative energy is ready to take up the power slack; and, indeed, before sufficient sustainable assets are available to invest in.

On the underwriting side, the social cost of the campaign could be high. Sudden retreats from companies that rank as ESG idlers could jeopardise whole communities and even economies.

What’s more, does anyone really know what sustainable means? A “taxonomy” of the good, the bad and the ugly is still in the works and is likely to be the subject of intense debate.

But right now it looks as if the sustainability objective creates ample scope for greenwashing and – depending on what makes the cut as ideologically sound – will end up promoting one set of assets deemed to do good and side-lining many others.

A new commission will take office in November and the horse-trading over who gets the top jobs will be as lively as ever.

Whichever officials don the sustainability mantle, it’s important they are flexible and ensure the financial sector isn’t labouring alone at the, ahem, coal face, of the transition to a low-carbon economy.