In March 2021, A.M. Best, the global credit rating agency, became a signatory to the United Nations Environment Program's (UNEP) Financial Initiative Principles for Sustainable Insurance (PSI). These principles serve as a global framework for the insurance industry to play an ever-increasing role in addressing environmental, social and governance (ESG) risks and opportunities.

As concerns about climate and extreme weather—as well as consumer and shareholder responses to climate inaction—become more prevalent, over 140 organizations worldwide have adopted these principles.

“If you pull the lens back, the environmental insurance marketplace is just a sliver of the insurance marketplace overall, but I do think the ESG impact is starting to affect the environmental insurance marketplace," says John Heft, senior vice president, RT Specialty. “There's increased pressure to be a good environmental steward, not only in insurance but throughout the manufacturing and energy sectors, automakers and other industries."

In environmental insurance, carriers are pulling back when insuring certain classes of business.

“We're starting to see a few carriers basically saying, 'We're no longer going to be able to write those classes of business because they're in the fossil fuel/non-renewable energy space and that flies directly in the face of our ESG programs,'" Heft explains. “And it's not just focused on environmental insurance; it's coming from the C-suite that they're pulling out across all lines."

Looking ahead, “solar, wind and biofuels will add to the power-energy mix and carriers, along with agents, will be there to support clients' transitions to cleaner energy sources," says Brad Nehring, director, energy, RB Jones, an H.W. Kaufman Group company.

For independent agents, the advent of ESG programs has created “opportunities with potential clients because the information needed for evaluating risk is now more readily available with companies who have a specific ESG department or team," says Timothy Donnellon, senior broker, environmental, Burns & Wilcox. “Those that have these programs usually have internal employees within client operations that are trained and motivated to proactively manage their environmental exposures."

“In the big picture, environmental insurance will support a ESG initiative," says David J. Dybdahl, president, ARMR. “Insurance in general plays an important role in the risk governance of the economy. The insurance mechanism has the unique ability to incorporate the cost of risk into goods and services in real time. Insurance is also unique in its ability to reward good behaviors with lower insurance costs and to penalize risky behavior with higher insurance costs."

“But the inherent advantages of insurance as a risk governance metric in ESG initiatives fall apart because of the pollution exclusions in standard property and liability insurance policies," Dybdahl says. “As a result of universal pollution exclusions, the environmental risks in the customer base remain unaddressed in most insurance agents' book of business. ESG initiatives are bringing those risks to the forefront for the first time and insurance agents that can help their customers manage environmental risks will be in greater demand because of ESG initiatives."

“While the environmental insurance market has been in a state of over supply relative to demand for over 30 years, the expertise to manage environmental risks is in short supply," Dybdahl says. “The real value an insurance agent can bring to the table is not to simply offer to get quotes for pollution insurance. Agents that access specialized knowledge in environmental risk management can help their clients develop ESG programs. Larger brokers have dedicated resource departments in this area. But independent agents will need to seek out subject matter expertise either resting in the environmental insurance markets or in the specialized wholesale brokerage space."

Carriers, agents and brokers with expertise in environmental risks across multiple lines of insurance will be able to offer the most value.

“The environmental insurance underwriting process itself will help customers identify, prevent and control environmental loss exposures and thereby enhance their ESG initiatives," Dybdahl says.

Looking to the future, the recent passing of the $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) will “spur significant increases in new construction and manufacturing industry in the U.S., leading to greater coverage needs," Donnellon says.

“By next spring or summer, these construction projects are going to be flowing pretty regularly in various parts of the country," Heft says. “I don't believe any of them are going to be small projects, but larger projects with a few hundred million dollars in construction values and up."

Taking into consideration who the client is and if they are a large enough company, agents may need to talk to them about ESG and shareholder pressure following any environmental damage caused by them.

“Any environmental event can have significant adverse effects for a customer of any size when they occur," Dybdahl says. “When a publicly traded company has to disclose to the press they just created a $5 million problem in the local stream and that they were self-insured, which is simply a feel-good word for being uninsured, within two weeks of that we-are-uninsured announcement I would expect shareholder value to go down by 10 to 14 times that amount."

“For a privately held company in the same situation with the stream, I would expect the company's credit capabilities to be impaired for years with uninsured environmental legacy costs on the books," Dybdahl adds. “ESG programs that capture the efficiencies of environmental insurance for risk governance should help prevent those situations from happening."

Olivia Overman is IA content editor.