Lloyd’s has recently published new guidelines encouraging managing agents to set up their own ESG frameworks in 2022. Irina Velkova looks at what agents can do to achieve these "minimum expectations".
In line with its ESG strategy and commitment to achieving net-zero greenhouse gas emissions by 2050, Lloyd’s is working towards both approaching its own underwriting sustainably, and measuring the wider market’s progress towards achieving this goal. To that end, they're developing a climate transition measurement framework to be tested through a market pilot, with a limited number of managing agents in 2022 to further refine it. Following onto testing the framework, from 2023 Lloyd’s will be implementing a ‘Sustainability Transparency and Reporting’ regime.
What should managing agents consider to comply with Lloyd’s guidelines?
To help managing agents deliver on these expectations, Lloyd's has set out several areas that they should look at in the context of ESG-related risks: from supporting green industry to sustainable investments.
Lloyd's considers that each managing agent should develop and incorporate an ESG framework that is suitable for their business and in line with industry practice, and points at the key elements to be considered as part of this framework. This includes a governance structure that embeds ESG in decision-making, as well as considering how sustainability is embedded across underwriting and investments. Additionally, they consider incorporating a risk management system that responds to ESG risks, including the financial risks of climate change in line with PRA supervisory statement SS3/19 and the use of data and reporting to monitor and disclose on ESG.
Lloyd’s guidance points at four of the most common ESG standards, which managing agents are advised to refer to when establishing their ESG frameworks. These are:
Task Force on Climate-Related Financial Disclosures (TCFD) reporting
UNEP FI Principles for Responsible Investment (PRI) reporting
UNEP FI Principles for Sustainable Insurance (PSI) reporting
Lloyd’s sets out a high-level framework that can be used by the managing agents based on the four Principles for Sustainable Insurance.
According to the proposed framework, managing agents are expected to set an ESG risk appetite and identify the ESG-related risks that are most material to their business and underwriting activities. In 2022, as a minimum, Lloyds expects managing agents to create a first version of their own ESG frameworks, governance and strategies.
Establishing a policy on sustainable insurance
Lloyd’s is encouraging managing agents to implement a sustainable insurance policy, which is aligned to the market’s overall goal of achieving net zero. Therefore, the guidelines look specifically into certain areas that should be looked at, namely how ESG factors can be considered. This includes client onboarding and distribution, setting appropriate ESG targets with regards to business planning, portfolio steering management information, and specifically how ESG is factored in the underwriting process and new product development.
Improving policyholder practice
The guidelines note that managing agents may be exposed to ESG risks through their underwriting activities and suggests that these risks may be managed and/or mitigated by engaging with direct policyholders and intermediaries and by introducing a policyholder engagement strategy. Managing agents can partner with direct and indirect policyholders to support them with their approach in transitioning from operations and/or activities that present the most material ESG risks to their business and to their insurer, which can be achieved via policyholder transition plans.
Product innovation to support green industry
Managing agents are also encouraged to take a proactive role in promoting sustainable insurance products that reflect changes in policyholders’ risk profile, changes in physical and economic environment, changes in technologies, and changes in societal needs.
Sustainable insurance governance
The guidance also highlights the importance of developing an ESG strategy and ensuring that there is appropriate governance in place to achieve its outcomes. This is achieved by focusing on the need for clear roles and responsibilities in terms of oversight of the strategy and the day-to-day execution and management of the sustainable insurance policy. As a minimum, in 2022, Lloyd’s expects managing agents to consider which sustainability and ESG factors should be included in the underwriting decisions, and where these factors should be incorporated into their ESG strategy and approach documents. In addition, they should consider the appropriate level of oversight and ESG governance responsibilities of internal stakeholders as part of setting their ESG strategy and be clear on the most material areas of their underwriting in terms of ESG risks, including areas relating to high carbon-intensity business.
Responsible investment policy
Moreover, the Lloyd’s guidelines underscore that managing agents should implement a 'responsible investment' policy, which will cover strategy and governance, ESG integration, stewardship and voting, as well as communication and reporting.
Lloyd’s anticipates that managing agents may need to develop their own responsible investment policies and governance frameworks that is appropriate for their size, scale and ambition.
Lloyd’s expects that managing agents who work with external investment managers should develop their first set of ESG criteria for manager selection and develop an ongoing mandate for external managers that incorporates ESG considerations, such as their responsible investment policies and ESG integration capabilities. In addition, as part of setting their responsible investment strategy, managing agents need to identify the appropriate level of oversight and ESG governance responsibilities of internal stakeholders. They also need to consider the most material areas of their investments in terms of ESG risks, including areas relating to high carbon-intensity business.
What can managing agents do next?
While these guidelines introduce a relatively softer approach to integrating ESG into the Lloyd’s market, from 2023 onwards, managing agents are expected to be reporting against each of the elements highlighted above. To do so successfully, agents will have to start implementing policies and procedures imminently.