Environmental, social and governance (ESG) risks are increasingly essential to investors in the property and casualty insurance sector, says DBRS Ltd.
In a new report, the rating agency said that ESG factors are increasingly significant to investors but that related disclosure needs to be standardized and mandatory so that is serves investors.
“Incorporating ESG risk factors into investment decision-making is a growing trend for insurance companies globally, especially in Europe where it is mandatory for large companies,” the report said.
Corporate ESG disclosures are used to evaluate a firm’s purpose, strategy and management quality, it said.
In particular, environmental risks are a key consideration, as they may impact an insurance company’s financial strength and can also affect the frequency, predictability and severity of claims.
From the investor perspective, these considerations are gaining significance.
“ESG risk factors have been incorporated into our credit ratings historically; however, there is now a stronger emphasis on highlighting the relevant ESG risks for issuers,” DBRS said.
Increased pressure from investors, stakeholders and activists has pushed many companies around the world to voluntarily provide greater ESG disclosure, the report said.
While the trend is gaining momentum, “regulatory backing and standardization are essential to drive broad acceptance of the practice,” it said.
“Making it mandatory in other jurisdictions outside of the European Union will have a positive impact on broadening the adoption of ESG reporting in a more comparable manner,” it concluded.