Reflections on 2023: Five key ESG themes

As another year draws to a close, ESG Insurer outlines five key trends that have had the sector talking in 2023…

1. Using data and analytics to accelerate the transition

One of the key themes of 2023 has been the start of a shift from pledges and promises to concrete action in harnessing the capabilities of the (re)insurance sector in facilitating the low-carbon transition.

Liz Henderson, global head of climate risk advisory for risk capital at Aon, outlined to ESG Insurer the growing recognition of the critical nature of insurance in unlocking the investment needed to develop new green projects.

Ensuring underwriters and brokers have a handle on the fundamentals of new risks – whether hydrogen facilities, battery storage systems or carbon capture technologies – in order to provide long-term capacity requires strong data and analytics.

For example, losses in the US commercial solar industry – in particular as a result of hail – have seen underwriters turn ‘back to basics’ by using catastrophe and climate models to fill gaps in historical data records to create a more robust view of how the peril is likely to affect particular regions with solar farms.

Henderson added that COP28’s agreement to “transition away” from fossil fuels will likely see increased investment in renewables from governments around the world – setting the stage for the (re)insurance sector to step up.

“We’ve done a lot of talking in the past in a theoretical way, and now we’re starting to see how you can put the building blocks together,” said Henderson.

“It’s about bringing the people together in order to get deals done, create capacity and build a market, so that insurance is there when the financing is ready to come in and the transition is really starting to accelerate. And data and analytics play a very tactical role to unlock capital and to bring capital to risk.”

2. A year of two halves for offshore wind

While the COP28 agreement sets the renewable energy sector up for a busy 2024 and beyond, it hasn’t all been smooth sailing in 2023.

Tim Halperin-Smith, partner in the renewables, power and energy practice at McGill and Partners, described the past 12 months as a “mixed year” for renewables from an insurance perspective.

Offshore wind saw a strong first half of the year, with several projects reaching financial investment decision – the stage in a capital project planning process to make major financial commitments – in both new and emerging offshore wind countries, such as the US, Poland and Taiwan.

“In particular, the offshore wind insurance market passed a significant early test to provide the material capacity required for multiple offshore wind projects in the US (4.5GW+), requiring substantial limits, including named windstorm,” Halperin-Smith noted.

“However, for the second half of the year, offshore wind has been inevitably impacted by the global supply chain constraints and inflation pressures, leading to significant offshore wind projects being postponed or cancelled.”

Halperin-Smith spoke to this publication earlier in the year on the uncertainty facing the offshore wind insurance market as carriers waited to see whether underwriting actions delivered the intended profitability and wider market stabilisation.

As supply chain issues and inflationary pressures bite, the positive trend to rate and coverage stabilisation in the sector will hopefully provide balancing tailwinds (no pun intended) as offshore energy underwriters head into 2024.

3. Macro issues slowing the pace of change

Although awareness and understanding of ESG issues and their materiality to the sector and individual companies continue to grow, macro factors such as regulation and stakeholder pressure have seen a drop-off in momentum.

“The fundamentals and the direction of travel for ESG remain strong, but the pace of change has slowed. Despite the comparative maturity of ESG being considered in investment decisions, in underwriting, there remains a while to go,” said Miqdaad Versi, partner at Oxbow Partners.

And as ESG issues push reputational risks up the corporate agenda, potentially damaging events increasingly have real financial value to a company, whether penalties and fines as a result of regulatory non-compliance or lost revenue from a crisis management perspective.

“As more regulatory authorities are demanding companies to disclose their emissions (and more), it is harder to justify not collecting this data and understanding what it should mean for underwriting decision-making.”

However, the collapse of the Net-Zero Insurance Alliance, in combination with political pushback in the US and the cost-of-living crisis prompting governments to prioritise energy security over transition, means insurance companies have been slower to collect data for decision-making than investment firms.

“Only a very select few have made significant progress i.e. understanding their baseline, defining short-term targets and embedding considerations into their underwriting decision making,” Versi added.

4. Value generation in the carbon markets

However, it is not all doom and gloom. In particular, the ability of insurance to act as a ‘seal of approval’ in the voluntary carbon market as it develops and scales has been a positive development.

Carbon credits have existed as a mechanism for pricing and transacting carbon for around 20 years but have grown in profile and volume over the last three to four years.

“There is a shift in ESG from risk mitigation to value generation. As green investment continues to rise, the role of insurance will continue to be pivotal in catalysing these markets and making them a success,” said Versi.

“Given the trust challenges in the voluntary carbon market in 2023, there is a real potential for 2024 to see the market take off and carbon credit insurance play an important role in driving the market forward.”

In particular, conversations around the fungibility of carbon credits poses a key opportunity for the industry to leverage its history of risk management and portfolio construction.

While in theory one tonne of carbon is equivalent to another tonne of carbon, discussions over 2023 have highlighted that, in practice, the value and price of carbon credits is influenced by factors such as additionality, permanence, leakage, co-benefits and alignment with wider corporate ESG strategies.

Carbon credit insurers have therefore been positioning themselves to help bridge the gaps for corporate buyers of carbon credits – including Oka receiving approval to launch an Asta-managed syndicate-in-a-box at Lloyd’s in January 2024, while Kita has been exploring how to pay claims in carbon credits going forward.

5. Advances to the adaptation and resiliency agenda

The growth of parametric solutions across both developed and emerging markets to provide a mechanism for predetermined financing to help individuals and communities invest in adaptation and risk reduction measures is ESG Insurer’s fifth and final key trend from 2023.

One only needs to look at the raft of proposals that were announced or launched at COP28 in Dubai – although momentum in this area has been building all year long.

“There's been a significant lack of financing for adaptation measures. There’s still a fundamental belief that adaptation financing is not as profitable. But adaptation is really what insurance is very good at – we know how to incentivise investment in adaptation through premium reduction,” said Aon’s Henderson.

This has been generally concerned in smallholder farming communities that are highly dependent on yearly crop yields for local food systems, as well as in the area of ocean and coastal resilience.

For the former, Africa Specialty Risks’ head of parametric Raveem Ismail spoke to this publication recently on the way in which insurers can solve one of the oldest and most basic problems at the base level of the economic pyramid.

“It is of vital importance that more resilience is added into this part of the economy. Insurance is already helping in those areas – there are hundreds of thousands of smallholder farmers aggregated into sub-national and national programmes,” said Ismail.