How ESG affects the entire insurance supply chain

Implementing environmental, social and governance (ESG) strategies will create a ripple effect impacting the entire insurance supply chain and billions of dollars in investments, said George Longo, president and CEO of MGA Excess Underwriting. 

“The ripple effect is going to be enormous,” Longo said in an interview with Canadian Underwriter. “It’s moving hundreds of thousands of people in a different direction.” 

Longo spoke from the perspective of Lloyd’s, which has committed to transitioning to net-zero greenhouse gas emissions by 2050. As a Lloyd’s coverholder, Markham, Ont.-based Excess Underwriting is part of the entire Lloyd’s ‘supply chain’ that is mandated to slowly move off industries, such as those involving coal-fired plants, Arctic energy projects and oilsands by 2025. (This includes industries that derive at least 30% of their revenues from these projects.) 

To do that, Excess Underwriting is guided by an ‘exclusion list’ of an insurer “and they would typically say, ‘We don’t write any of the business,’ and now it includes all of these carbon-emitting types of industries,” Longo said. In turn, the MGA is informing brokers of the classes of business they are moving away from.

“How do you tell the broker to move away from these projects which we might be insuring?” Longo asked. “It’s simply just going to be, ‘It’s our underwriting appetite as dictated by Lloyd’s.’” 

In effect, the excluded industries can’t be touched from an insurance standpoint, Longo explained. And the list of exclusions is broadening.

“So, any industry that supplies, or that works within the scope of that oil and coal mining-type of industry, [is] excluded,” Longo said to supply examples. “And [Lloyd’s] is expecting each syndicate to implement an ESG strategy and framework for the purposes of [the MGA’s] business for their underwriting model.” 

Excess Underwriting’s book of business is largely unaffected. “But I do know we do have some very large broker clients where there will be implications [because] they are oil and gas specialists,” Longo said. “That’s a challenge because it’s going to undermine that entire book of business. These books of business are quite significant, in the tens of millions.” 

ESG is also affecting investing decision-making.

Investors are looking at responsible investment alignment, fee structures, governance, ownership, conflicts of interest, and generally any related transactions in affected industries “from top to bottom,” Longo said. “They want to make sure that entire business is moving towards more of a greener company. It’s a massive project, because the investments are enormous. And it’s affecting all of those not just insurance companies, but every major investment firm.” 

The problem is time, Longo said, because the ripple effect of pulling out investments from these companies is enormous. “It’s not just affecting that particular industry, but there’s jobs, there’s community effects. And we’re not talking small investments, we’re talking billions.” 

Longo said he anticipates Lloyd’s will come out with their 2023 ESG plan fairly soon to help guide the process. “And I think it’s going to have more teeth to it. We’re going to see them imposing some sort of planning strategy throughout the entire supply chain.”

Feature image by iStock.com/Igor Borisenko