Market Overview

Best's Briefing: Considering Environmental, Social and Governance Factors from a Credit Rating Perspective


There has been a shift in investor expectations in recent years, with
shareholders judging companies on a broader spectrum of criteria, rather
than solely on financial metrics, according to a new briefing by A.M.
. Insurers and reinsurers, with their unique societal role as
risk managers, risk carriers and investors, have not been immune from
the trend to adapt and consider environmental, social and governance
(ESG) risks and opportunities in their operations and assess what kind
of impact they might have on their Credit Ratings.

The Best's Briefing, titled, "Considering Environmental, Social
and Governance Factors from a Credit Rating Perspective," states
insurers and reinsurers are facing consumer demands that they take
positions on issues ranging from climate change to gender equality. In
addition to elevated public interest, companies are under pressure from
non-government organisations and regulatory authorities, particularly in

Jessica Botelho, financial analyst, said: "Overall, this shift in focus
toward understanding how companies are managing ESG risks and
opportunities is not simply a fad that is likely to fade. Moreover, as
insurers conduct their business with long-term time horizons, European
market leaders in particular have committed to embedding ESG into the
cultures of their organisations."

The report states ESG risks vary by industry and are considered material
when it is likely that companies will incur substantial financial costs
in connection with them. For insurers, perhaps the most obvious risk is
climate change, which has the potential to lead to an increase in the
severity and frequency of severe natural catastrophe events. Conversely,
ESG opportunities focus on a company's ability to identify and
capitalise on relevant challenges for profit, such as developing new
products for the renewable energy sector.

With no industrywide ESG standards in place, it can be overwhelming for
insurers and reinsurers, particularly small- to medium-sized entities,
to understand fully how to implement and disclose ESG practices.
Although there has been significant progress in the harmonisation of
methodologies and standards, further improvements concerning the
definition of key metrics and educating users on the importance of ESG
in financial analysis are still required. A.M. Best will continue to
monitor developments in ESG and determine what impact, if any, they have
on Credit Ratings.

To access a complimentary copy of this briefing, please visit

A.M. Best is a global rating agency and information provider with a
unique focus on the insurance industry. Visit
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