NAIC issues policies, but not regulation, on ESG investments

By Doug Bailey

The National Association of Insurance Commissioners last week unanimously embraced environmental, social, and governance (ESG) policies for the insurance sector, an expanding metric to grade insurers’ underwriting, investing, or other business decisions.

ESG first arose 18 years ago in the United Nation’s Principles for Responsible Investment (PRI) report and has since been gaining ground as major institutional investors are clearly expecting the companies, they hold to commit strongly to ESG criteria.

Critics of the movement say ESG investments allocate money based on political agendas rather than on earning the best returns for savers. Most notably, failed presidential candidate Vivek Ramaswamy, who authored several books bashing ESG as a way for companies to push ideological agendas without regard for shareholder returns, has been one of the most vocal critics.

Nevertheless, the push for corporate acceptance of ESG guidelines continues.

The NAIC, whose membership is composed of the chief insurance regulators in all 50 states, the District of Columbia, and the five United States Territories, said Thursday it does not anticipate developing regulatory policy to mandate or prohibit insurance companies from adopting ESG policies.

“However, we have extensive work underway on climate risk, race and insurance, corporate governance, and other related factors to the extent they directly pertain to our responsibility to protect policyholders and supervise the financial health of insurers,” the organization said in a statement. “The NAIC encourages insurers, regulatory bodies, standard setters, and policymakers to consider the reliability of metrics and the impact of ESG policies on the financial condition of insurers and the availability and affordability of insurance products and services, if adopting such policies.”

N.H. touts acceptance of policies

Some state commissioners are already racing to tout their acceptance of the policies. In a release this week, the New Hampshire Insurance Department echoed the NAIC sentiments, which it said underscored its dedication to aligning with ESG policies.

“Our mission is to empower companies to make optimal investments, safeguarding their solvency to fulfill consumer claims,” said New Hampshire insurance commissioner D.J. Bettencourt. “We approach this task with a focus on risk assessment, respecting the boundaries of our statutory mandate. While we provide oversight, we believe investment decisions are best entrusted to companies, minimizing under governmental intervention.”

While some companies are embracing ESG to support their own sustainability goals, derive reputation benefits, or comply with regulations, most are being driven to do it by stakeholders as a form of risk management.

“ESG provides stakeholders with a way to measure a firm’s long-term viability by more than profits alone,” says a report by ESG consultants Marianna Moores and Lauren Wallace, of Salas O’Brien, a national employee-owned engineering and facility planning firm. “It helps them assess a company’s risk exposure as well as its potential future financial performance.”

Armed with an ESG report, stakeholders can now evaluate the quality of an organization’s business practices and corporate responsibility in a way that used to be reserved exclusively for internal management,” the report says.

ESG performance informs 'investment decisions'

“In turn, stakeholders are using ESG performance when making investment decisions. For example, discounts may be applied when certain ESG focused lending criteria are met.”
Ideally, the authors said, ESG policies can promote growth, reduce costs, attract talent, and lead to greater government support with less risk of intervention.

“ESG represents a crucial opportunity for organizations to promote sustainable and responsible business practices,” the report says.

More than $35 trillion of assets worldwide were said to be monitored using some sort of sustainability or ESG lens in 2020, according to a review by The Economist, an increase of 55% since 2016.

“Investors, banks and businesses have signed up to a series of alliances … pledging to bring down their own carbon emissions and those of their portfolios. And bosses of S&P 500 companies now mention ESG nine times a quarter in earnings calls, on average, compared with just once, if at all, in 2017.”

Indeed, critics say ESG investing comes with some serious caveats. ESG funds may come with higher-than-average expense ratios because they require more research and due diligence, which can be costly. ESG investing can also be subjective, motivated by political concerns. Some have raised the specter of ESG metrics being too complex and unreliable.

The NAIC said it is encouraging insurers, regulatory bodies, standard setters, and policymakers to consider the reliability of metrics and the impact of ESG policies on the financial condition of insurers and the availability and affordability of insurance products and services, if adopting such policies.

“The NAIC is committed to providing an open forum for our members and stakeholders to raise important issues, like ESG, that may impact our sector,” its statement said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].