The survey is the basis of a new report–ESG in Bermuda: The Rising Tide–produced by the Business Development Agency (BDA) in partnership with consultancy Oxbow Partners “in the belief that greater transparency over ESG activity in the market will allow all members of the Bermudian ecosystem to refine and accelerate their strategies”.
The survey is based on interviews with executives from 21 firms on the Island. It found that 72% of those companies have started engaging with ESG concerns and are at the early stages of their ESG journey, with a further 14% having a developed ESG approach. However, 14% said they had not yet taken any formal action on ESG.
Participants highlighted many strengths of the Bermudian market that can be leveraged to push forward the ESG agenda. For example, the Bermudian industry is at the forefront of discussions at the Insurance Development Forum about how to improve resilience in developing markets. Some 86% of participants believed Bermuda’s expertise in natural catastrophe risk transfer would allow the industry to drive environmental issues forwards. Many also commented on the long history of corporate philanthropy on the island, including charitable, voluntary and educational schemes. The Bermuda Monetary Authority’s pragmatic approach to regulation was also cited as a strength. Some 43% see ESG as an opportunity, whereas only 19% see it as a risk.
All but one of the 21 companies were willing to disclose their participation in the survey. They are: Aeolus, AIG, Ariel Re, AXA, African Risk Capacity, Argo Group, Aspen, Axis, Everest, Fidelis, Global Atlantic, Hamilton, Hiscox, Integral ILS, Kettle, Nephilia, Renaissance Re, SiriusPoint, Sompo and Vantage.
Drivers and barriers of ESG
Investors and shareholders were cited as the main driver of ESG (mentioned by 86% of participants), closely followed by employees (81%). Some 38% mentioned internal management, ahead of regulators at 29%. Whilst most believe that Bermuda is ahead of the US in ESG maturity, 76% of companies recognised that the maturity of Bermudian regulation is behind Europe. As a result, almost all participants expect to see greater regulation in the future, including a shift in focus from guidance to mandated action. Rating agencies are not currently a driver, despite ramping up their ESG coverage.
The participants were also asked about barriers to advancing their ESG journey, and 71% said they see resource as the limiting factor, and 67% of those with ESG resource had fewer than two full-time employees working on this. Some 43% also cited the lack of reliable ESG data (including a lack of data standardisation) as material issues. Furthermore, many firms expressed concern about disclosure because of the reputational and increasing legal risk that it attracts.
Underwriting versus investment
Some 32% of the firms surveyed have integrated ESG into underwriting and in most cases, this is as a “simple exclusion to risk appetite”. For example, 45% are actively reducing exposure to certain lines of business such as thermal coal. Only 32% have started to source ESG-specific data for their underwriting processes, and most are still trying to understand what to do with this data, partly because of the non-predictive and inconsistent nature of the data. Some 92% of participants who had not done so already said that they intended to integrate ESG into their underwriting approaches in the future.
ESG is more embedded in investments, the survey found, with 47% of participants saying they had integrated it in some way, but it also recognised that many do not manage their own investments. Some re/insurers are using third-party data providers such as MSCI to assess the carbon footprints of their portfolios, with some of the same caveats about the quality of this data as their underwriting colleagues.
What to do now
ESG is no longer an “optional side project” for large companies’ sustainability teams, the report notes, and every re/insurer on the Island needs to consider its ESG positioning. For re/insurers and ILS funds, the objective is to embed ESG across their business, rather than see it as a standalone objective, the report adds.
They should consider actions in the following areas: document current activity; create a vision and ambition; develop a strategy and action plan, with resources to embed ESG; develop am ESG data strategy; and improve collaboration.
Transparency allows for greater accountability and ultimately success in the fight against climate change and as such plays a central role in any ESG strategy or framework, it says. As far as external reporting is concerned, 71% of the Bermudian re/insurers surveyed have ESG pages on their website, but only 52% have published an ESG or sustainability report in line with at least one recognised industry standard. Of those not yet disclosing, 30% were planning to release an aligned report in the coming year.
What Bermuda says, matters
The term ESG was coined by the UN’s Environment’s Principles for Sustainable Insurance (UNEP-FI), as a better way of understanding factors which were not traditionally included in financial decision making.
UNEP-FI works with banks, insurers and investors to create a sustainable finance sector. They are responsible for creating the Principles for Sustainable Insurance, to which a handful of Bermuda re/insurers are signatories. Since then, there have been a number of important initiatives which remain the cornerstones of UNEP-FI’s approach on ESG for the re/insurance ecosystem
“The Principles for Responsible Investment addressed the problem that sustainability meant different things to different investors and demonstrates the materiality of ESG as a legitimate risk input for financial markets,” UNEP-FI programme leader Butch Bacani says in the BDA-Oxbow report. “The higher-level set of Principles for Sustainable Insurance (PSI) has been developed for the industry, which is often misinterpreted as being just for underwriting. The ESG guide for non-life insurers took years to develop and is a comprehensive view of how to systematically embed sustainability into insurance.”
On the role of insurance in ESG, Bacani said many people see insurance primarily as a “financial shock absorber” when it comes to ESG, but the expertise around risk and resilience is an undervalued asset in the industry.
“The PSI have helped develop the narrative from merely dealing with the impact of climate change to actively closing the protection gap, promoting resilience and understanding of how insurers can influence and mitigate against the root causes,” he said. “Insurers cannot just think about insured risks but must also develop products such as microinsurance. They need to help facilitate decarbonisation by stewarding the transition of portfolios in the real economy and develop methods to incentivise resilience.”
Bermuda has a crucial role in driving ESG forward, he said.
“What Bermuda says, matters. Any major risk capital like Bermuda has significant influence and should, by default, be a leader in championing the sustainable insurance agenda. It has promoted a very positive narrative on resilience – an area where it can be a world leader. However, like all risk capitals, there is room for improvement.
“Bermuda lags Europe on many areas related to ESG and much more can be done. Regulators and policymakers, including the BMA, must drive the discussion forward and support the important ESG leadership demonstrated by many re/insurers in the market.”
A fair representation
The report was presented at the Bermuda Climate Summit by Miqdaad Versi (pictured), head of ESG at Oxbow Partners.
Speaking to Bermuda:Re+ILS during the summit, Versi said 21 firms was a “fair representation” of large companies among re/insurers on the Island, who cover a large portion of the industry’s gross written premium. It doesn’t cover smaller companies, which are much more likely to be at the beginning of their ESG journey, he said.
“I think the prospects for Bermuda are really interesting and really positive. There has been a step-change, it seems, in the last 12 months to a real willingness and drive to make a difference. ESG is on the agenda of boards across Bermuda and it's going to continue growing in the coming year.”
The purpose of the Bermuda Climate Summit was to showcase the Island as the world’s future capital of climate risk finance. Asked about this ambition, Versi said: “When you look at the front end of people here based in Bermuda, there are things that are competing with the rest of the world in terms of how you look at net-zero underwriting, how you look at incorporating ESG into underwriting decision-making, and when it comes to looking at Diversity, Equality and Inclusion. But there's an aspiration to do significantly more going forward and the emphasis of the Summit is very much aligned to what we were seeing in the report.
“On understanding climate risk, there aren’t many people who do property cat better than Bermuda. There’s a lot of innovation here on climate risk, but ESG is a bit more than that though. I think Bermuda has some very big strengths when it comes to certain elements of diversity, philanthropy and social responsibility. The spending on research by universities into resilience from some of the biggest reinsurers is globally impactful. Does Bermuda have a good resume on ESG? Yes, very much so. Does it have the best? No, I don't think so, but it depends on what your expectations are. I don't think we can necessarily compare companies here, where the resources allocated to ESG may be one, two or three people, to some of the large re/insurers in Europe that have 50 people working on it. The question, rather, is: ‘Are similar sized companies globally doing similar types of things?’ And we can say that what is being done for ESG in Bermuda is definitely in the right direction; the push is there, the emphasis is there and the ambition is there.”
Move away from tick-boxes
The BDA organised the Climate Summit in partnership with the Association of Bermuda Insurers and Reinsurers and Kroll Bond Rating Agency (KBRA). On the eve of the conference, Jim Nadler, president and CEO of KBRA, told Bermuda:Re+ILS that KBRA is different from its competitors, in that it has chosen not to provide ESG scores as other rating agencies currently do. He said one of the biggest problems with ESG ratings is they join the three elements in a single score, which can be misused in order to ‘greenwash’ a company’s activities.
Asked about this assertion, Versi said: “All ESG data providers are trying to find a way to quantify something that sometimes is quite qualitative. What that means is that often in some of the data scores you need to have done certain things to be able to get a good rating. So, for example, a company could be supporting the clean energy transition of a client who aims to reduce its fuel coming from coal to 20% in two years’ time from 80% currently. That's a good thing, but most credit rating agencies wouldn’t take that into account. As a result, there will be companies who don’t think the ESG scores are a fair reflection of what they are trying to achieve. But you can see from a lot of the things that we have chronicled in our report, that there is an ambition, that all the companies really want to up their game.”
And Oxbow can support companies in their work on ESG, he added.