ESG in the spotlight as London market softening gathers pace

THE London market’s efforts to implement ESG principles in underwriting have reached an inflection point as geopolitical challenges and a softer market refocuses underwriters, according to the head of sustainability at Lloyd’s third-party managing agent Asta. 

Insurers are facing fragmented global regulation on ESG and sustainability on top of the pressures to remain competitive and meet targets in a softening market. As a result, many firms view this as an opportunity to take stock and consider how they approach sustainability going forward, Phil Pearce says.  

“The geopolitical landscape is a massive factor in how people have been maturing,” Pearce tells Insurance Day. “The market has probably just eased up a little bit because you’ve got a lot of fragmentation and divergence when it comes to national policy, regulation, and ultimately what investors and customers want.”

On top of this, underwriters are contending with the realities of softening markets and the pressure to find profitable business, he continues. “They’re saying: we’ve got an ESG policy that says we’re not allowed to underwrite something, but actually that’s the business that’s coming in that would be profitable. So how do we manage that?”

For instance, in the case of new gas or coal projects, Pearce says Asta’s clients are trying to balance the short term need for revenue with their longer-term business principles and ambitions. “It’s all well and good when everything’s going well that you put all these great, ambitious commitments in, but it’s how you take them forward when things aren’t going so well.”

This isn’t without risk, Pearce says, noting that backtracking on ESG commitments because of the market cycle might not look good to capital providers, customers or partners. Capital providers, in particular, continue to have their own views on sustainability — capital was one of the early driving forces of ESG — and many are still asking “fairly robust” questions on the topic. Jurisdiction also matters, with European insurers tending to be more mature in their sustainability position because the EU has always been the more progressive jurisdiction. “The UK is a little bit behind that, and the US is next along,” says Pearce.

Pearce himself has been head of sustainability at Asta for just over a year but has built his career on the issue. The issue of sustainability has been thrust into the limelight over the past five years by an increase in regulation, making it more important for businesses to have a dedicated professional in a sustainability role, he says. “It’s a very technical space. It requires someone who can help various teams and make sure there’s consistency.”

Since joining Asta, Pearce has been working to adapt its existing sustainability framework from something quite broad into a tool that could be used to improve both its own position and those of its clients.

“When I came in there was a lot of ambitious language about wanting to save the world,” he says. “We’ve got to think about what’s proportionate to our business model and where we can actually have influence. And the influence, to me, is via our clients because they’re the ones underwriting and that has a far greater potential impact.”

One of the practical steps was to start collecting more data, and to encourage the firm’s partners to do the same. Asta has built a “sustainability library” that serves as both a baseline for understanding what sustainability means, including such things as definitions, but also as a resource on loss data, trends and research. This helps the business to have conversations with its clients and, where necessary, challenge them on their approaches, Pearce says. 

“We’ve got to think about what’s proportionate to our business model and where we can actually have influence. And the influence, to me, is via our clients because they’re the ones underwriting and that has a far greater potential impact”
_{Phil Pearce
Asta}

There are many different points where Asta engages with clients on sustainability. These include key points in the year such as business planning and capital setting, as well as ongoing monitoring of whether businesses are meeting their target for sustainable business.

Across the portfolio there are a range of approaches when it comes to sustainable underwriting, Pearce says, with some having very clear policies and expectations around what sort of business they write and who they choose as a client.

“That’s very much a top-down appetite that needs to be set,” he continues. “Ultimately if they’re thinking about responsible underwriting, it’ll be about what’s their role with their existing capability and strategy to influence behaviours or select the right policy holders?”

As a managing agent, Pearce says Asta’s role is to support and provide appropriate challenge to clients, and not to enforce or dictate terms. This is why data is so important. “We want to come to the table with the right level of evidence and insight,” he says.

The managing agent also runs scenario analysis exercises with its clients to help them think about the implications of emerging threats such as climate risk. Last year, for instance, it developed two scenarios around climate change, the first was an orderly transition that saw temperatures remain below two degrees of warming, the second a ‘hothouse world’ outcome where global temperatures increase more than three degrees.

“We created a whole bunch of narratives where we described how transition would manifest in all economic sectors through different means,” says Pearce. These included new technologies, changing capital flows, policies and regulations but also things like customer sentiment. Based on these scenarios, clients were asked if they needed to make any changes in the short, medium and longer terms. 

Asta has also asked underwriters to quantify the potential impacts of these scenarios on their operating models or underwriting strategies and to assess whether the risk was all downside or if there were opportunities as well.

That doesn’t always mean underwriters will immediately pivot to focus on sustainability or start writing novel transition technologies such as carbon capture, but Pearce is confident the business case can always be found.

“Ultimately, everyone wants their businesses to be sustainable because they want them to be around long term. What we want to use the scenario analysis for is to say: if you’re closer to sustainability as a subject, you’re likely to be more resilient to developments that could make your business unsustainable.”

He continued: “Scenario analysis is such a healthy way of being able to have a good debate about something and allow people to challenge themselves. You’re not coming to the table saying, ‘this is factually guaranteed’ or ‘you have to do this’. Let’s have an adult conversation and say: if this does transpire, does this ultimately change the way that you’re thinking about your strategy?

“It’s all about that challenge, and I think for a topic like sustainability, personally I feel is the better approach,” he adds.