AM Best issues FAQ on ESG and insurance credit ratings, announces inclusion of ESG section in Best’s Credit Reports
OLDWICK, N.J., November 22, 2021— Recognizing the uncertainty surrounding what environmental, social, and governance (ESG) entails, and what actions or disclosures are expected from insurance and reinsurance companies, AM Best has released a new commentary addressing frequently asked questions about ESG considerations for financial strength and application of ESG within the rating process.
AM Best believes that communicating how it views ESG factors in the context of insurance credit ratings will provide greater transparency to the market. As a result, AM Best has developed an FAQ document to help provide additional background and context. AM Best also is pleased to announce the addition of an ESG section to Best’s Credit Reports under Enterprise Risk Management, which is effective on a rolling basis from Nov. 22, 2021.
Matthew C. Mosher, president and CEO of AM Best Rating Services, stated, “AM Best has always considered ESG risks in our credit rating analysis, when they were material and relevant to financial strength.” In 2018, AM Best’s methodology was updated to identify factors within the ratings process that are considered ESG factors and how these may impact any one of the building blocks used to determine our credit ratings. Mosher added: “The discussion of ESG factors in our methodology allows us to be more transparent as to how these risks impact our consideration of an insurer’s financial strength. The impact of ESG factors on financial strength varies depending on a company’s profile, exposures and level of risk transfer, as well as the markets in which it operates.”
AM Best recognizes that many insurance industry stakeholders seek more information about the impact of ESG. The addition of the ESG section to Best’s Credit Reports will promote transparency, highlight the ESG elements that are relevant and material to the financial strength of an insurance company and help AM Best better evaluate how an insurer manages these ESG risks and opportunities.
ESG and Insurance Credit Ratings: Frequently Asked Questions
Environmental, social, and governance (ESG) continues to be a key topic of interest among stakeholders in the insurance industry, but there is some uncertainty as to what it actually entails, and what actions or disclosures are expected from (re)insurers. (Re)insurers generally agree that more clarity is needed from regulators about the identification, measurement, and reporting of ESG factors.
AM Best believes that communicating how it views ESG factors in the context of insurance credit ratings will provide greater transparency to the market. As a result, we have developed this frequently asked questions (FAQ) document to help provide additional background and context. In addition, we have included an ESG Glossary at the end of the FAQ. We recognize that there are no agreed upon definitions for many ESG-related terms and this glossary provides AM Best’s perspective on how these terms are used in the domain of credit ratings.
1. What is ESG?
Environmental, social, and governance (ESG) is used to assess corporate behavior that may impact the future financial performance of companies. ESG is a broad umbrella that includes individual factors, all of which relate to an overall goal of building a resilient, inclusive, and sustainable society. The term ESG is used globally across industries and is not specific to insurance. However, understanding the relevant touchpoints of ESG on the insurance industry—particularly, on any impact on financial strength—is important.
Environmental factors pertain to the natural world and include considerations such as climate risk, resource use, energy use, pollution, and waste management. Social factors are those that affect human lives and relate to how a company interacts with the communities in which it operates, its suppliers, employees, and broader stakeholders. Governance factors relate to procedures and processes according to which a company is directed and controlled.
Consideration of ESG factors can assist companies and investors in identifying risks and opportunities that may not be captured by conventional financial metrics, to mitigate risks and enhance long-term returns.
Although accepted ESG standards are still in development, understanding how to implement and fully disclose their ESG practices can be challenging for (re)insurers. ESG factors vary by industry. Even in (re)insurance, when assessing financial strength, the relevant ESG factors will vary depending on the company’s profile, level of risk transfer, and operating environment.
2. What are ESG factors?
Below are a few examples of ESG factors:
Environmental: Climate risks; carbon emissions; natural resources use, pollution, and waste Social: Data privacy; human capital; product liability; stakeholder opposition; health and safety Governance: Corporate governance; corporate behavior; transparency; board composition; business ethics; diversity and inclusion
3. What areas of ESG are most important to financial strength?
The impact of ESG risks and opportunities on financial strength over the short and long terms is likely to vary depending on the nature of the company. We anticipate that factors related to climate risk and governance will have the greatest impact on financial strength over the near term, while environmental liability and certain transition risks are likely to become more relevant over time.
To access a complimentary copy of this Best’s Commentary, please visit here.
AM Best also is hosting a briefing on ESG on Dec. 1, 2021. To register, visit here.
About AM Best
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.