Underwriting the Transition: Chaucer, Moody’s Break New Ground With ESG Scorecard

As corporations increasingly navigate the environmental, social and governmental (ESG) landscape, they require tools and benchmarking to help them meet their ESG targets. After all, regulators are moving to enforce disclosure requirements.

According to Chaucer, a Lloyd’s insurer and reinsurer, insurers have a key role to play in this effort. That’s why Chaucer has developed an ESG Balanced Scorecard in partnership with Moody’s Analytics to help clients get on top of their ESG risks. The data-driven scorecard will measure the ESG performance of clients and business partners, helping them to become more sustainable.

“The re/insurance industry has a pivotal role to play in helping corporates make the transition to become more sustainable,” said John Fowle, chief executive officer of Chaucer, in a statement in September when the scorecard was launched. “This isn’t going to happen overnight, but by helping clients identify, manage and measure areas that are in need of improvement, we can help them implement incremental changes that will pay dividends in the long term.”

“We designed Moody’s ESG Insurance Underwriting Solution to help re/insurers measure ESG risk at the point of underwriting, integrating the solution into their business processes,” explained Mike Steel, general manager of RMS, a Moody’s Analytics subsidiary, in emailed comments. (In September 2021, Moody’s Corp bought RMS from Daily Mail and General Trust.)

“We’re keen to help our clients with the [net-zero] transition,” said Simon Tighe, group head of Investments, Treasury & Credit Risk, for Chaucer, in an interview with Carrier Management. “It’s a core focus for Chaucer…to be a force for good. We want to help push the ESG agenda.”

Chaucer’s ESG Balanced Scorecard aims to help clients identify their potential ESG gaps. “We’ll be able to bring that to their attention and come up with plans to help them improve and to move with the transition in a measurable way,” he said.

Christophe Burckbuchler, managing director-general manager for Insurance, at Moody’s Analytics, said the ESG framework is tailored to the needs of the insurance industry and includes an ecosystem of data points that matter to insurers, brokers and insureds. He said the tool can help insurers unlock new opportunities—helping them differentiate themselves by having stronger insights on ESG.

Market Consistency

Chaucer is hoping to convince competitors in the market to reach out to Moody’s, or other providers of ESG toolkits, to develop their own ESG criteria—because consistency is important in developing ESG analysis across the market. Within the insurance and reinsurance sector, “we hope that we start to coalesce around some sort of core ideas or core principles about which data points really matter…,” commented Fowle in an interview.

“We’re very much saying to our friendly competitors, if you think we’re onto something here, if you think this is sensible, please pick up the phone to Moody’s and talk to them about whether it also would work for you,” he said.

Tighe said the tool will help Chaucer with its own ESG profile as well as the profile of all its counterparties.

“[Chaucer provides] us with a list of counterparties’ names from their underwriting, investment and supplier portfolios…, and we bring those into our comprehensive entity database … to develop an in-depth picture for Chaucer’s ESG exposure across their operations.” Burckbuchler said.

Fowle emphasized that Chaucer doesn’t intend to take a redlining approach with the scorecard. “We really believe that our role as underwriters is to underwrite the transition, encourage the transition, and effectively be able to have an open dialogue with the brokers, the insureds and reinsureds about their transition journey.”

“For us, it’s not about good and bad clients; it’s about being a partner for them on that sustainability journey,” Fowle continued. “You can’t manage what you can’t measure, which is what the scorecard delivers.”

Every company is on some kind of transition journey, Fowle said. “We think all these conversations are likely to lead us to a sensible transition plan, insured by insured. It’s very unlikely that we’ll have many insureds who aren’t intending to hit sensible transition targets.”

However, if, over time, it becomes apparent there are some customers that refuse to change or take active steps to become sustainable, then that would require a different conversation, he said. “But we don’t see that being an issue since many of our clients are already taking positive steps in the right direction.”

Given the ESG momentum seen by other insurers, “it wouldn’t just be us that would find them harder to insure—it would be lots of lots of our competitors—so they are likely to start to be motivated, to be easier to insure,” Fowle said.

If there are issues or gaps identified on the balanced scorecard, Chaucer will speak to the client’s broker to try to understand what their strategy is for transition to net zero, Tighe said.

He explained that in the investment world, “the more sustainable businesses are proving to be more sustainably profitable. We think that is indicative and could be applied to the insurance industry, as well.” While there’s no data to back up that assumption as yet, Chaucer hopes “to start to really understand that going forward.”

Chaucer believes it can push the ESG agenda by helping clients to start thinking about the transition, how they will need to change, cope with the challenges and positively contribute to solutions, Tighe said.

“We think we are pioneers in this. We are definitely the first to do something at this scale, with this level of detail and data,” he said, noting that the scorecard also is aligned with the UN’s 17 Sustainable Development Goals (SDG).

In developing the solution, Chaucer wanted something that would become “a market standard to ensure comparability and consistency across the world industry,” Burckbuchler said.

And good progress toward that goal seems to have been made. Since the September launch of the scorecard, Burckbuchler said that many insurers and reinsurers have expressed interest in the tool. Customers recognize “the uniqueness of our proposition in terms of the depth and the breadth of the data…as well as the analytical rigor of this methodology that can assess not only the impact of ESG on your financials but the impact of a given company on your ESG dimensions.”

Description of Balanced Scorecard

Chaucer’s Balanced Scorecard uses 158 unique data points, based on 47 risk criteria, to evaluate the ESG performance of Chaucer and clients across underwriting, investments and operations. The risk criteria was born out of the UN’s Principles for Sustainable Insurance (PSI), which encourages an industry-wide commitment to ESG integration and works with industry partners to accelerate action.

Some of the metrics behind Chaucer’s scorecard include:

• Disclosure of greenhouse gas emissions
• Integration of environmental factors into the supply chain
• Health and safety conditions of workers
• Involvement in the local community and support of local infrastructure
• Boardroom diversity

The major challenge to the insurance industry is having access to relevant and reliable ESG data to access counterparties such as insureds and investments. That’s where Moody’s steps in. Moody’s analyzes the financial returns of more than 300 million companies, and therefore compiles the data that provide the basis for Chaucer’s ESG analysis.

Scorecard Data Points

Diving into examples of how the scorecard works, Tighe started first with the “E” or the “environmental” aspect of “ESG.” Looking at water management, he said, one of the data points identified is how much over-consumption does that client have. “If there’s over-consumption of water…and that issue is driving your score down, then we would ask, ‘What’s your plan to address your over-consumption?'”

Another example was with the hydrocarbon extraction of mining companies. “One of the data points we’re looking at is the ability to return the site to its original state or to an environmentally or socially advantageous one,” he said.

“If a hydrocarbon extraction practice company that doesn’t have that ability, we would ask them why and what is their plan to be able to have that ability,” Tighe continued. “It’s really trying to get down to that lower level of what impact is this company having on ESG as a whole and what are they doing to improve.”

As for the “S,” or “social” aspect of ESG, Tighe said some risk criteria would include worker health and safety, such as adequate temperature controls, or creating an environment for employees to work in a safe, controlled place.

Workers’ rights would be another risk criteria in the “S” category—for example, having a fair pay policy or how a company treats people who have to be resettled to different locations.

And finally, on the “G” for “governance,” the risk criteria would include data breaches or misuse of data. “One of the data points we have would be cybersecurity strategy, procedures and controls,” he added.

“These are just some of the things that we will be assessing, and this will all be combined into the balance scorecard to give us a full view of what this company’s impact is on the E, S and G.”

Raising Awareness

Tighe said the financial services industry is very aware of net-zero transition. “It’s one of the hottest topics within insurance, banking and investments. But you’ve got to get it out there to the rest of the world.”

Business interest in ESG matters is growing rapidly. For example, an annual survey conducted by the UK risk management group AIRMIC revealed that ESG topics were listed among the emerging risks identified by risk professionals. “ESG transition risks” was ranked No. 3, behind inflationary pressures and economic downturn. “ESG regulatory changes” was ranked at No. 6. Other connected ESG concerns were also listed, such as “systemic cyber risk” (at No. 10) and “diversity, equity and inclusion” at No. 13.

“Reputational damage from environmental, social and governance (ESG) issues concern risk professionals most,” said the AIRMIC report, titled “Risk and resilience in a perfect storm – Facing the future together, Annual survey 2022.”

“When economies move toward more environmentally sustainable models, transition risks can occur,” said the report, addressing the “E” part of ESG.

“Some industries could experience increased costs of doing business or see major shifts in asset values. Yet, it does not mean that staying put makes sense for these businesses because the risk of delayed action on climate-related measures could pose far greater costs to them ultimately,” it continued.

“While governments can legislate change, there is increased recognition that businesses are the economic engine to implement national targets for climate action,” said the report, quoting a speaker at last year’s United Nations Climate Change Conference (COP26) meeting in Glasgow, who said: “Governments commit the billions, but businesses can mobilize the trillions.”

AIRMIC emphasized that businesses need to be prepared for transition risks. “They need to anticipate rapid shifts in policies and regulations, besides developing low carbon technologies, and respond to changes in consumer behavior and investor preferences.”

In the UK, any retailer with more than 500 employees or £500 million in revenues is now required to disclose its climate-related financial risks. Smaller businesses will not have to report until 2025.

While the “E” part of ESG gets a lot of focus, as a result of its net-zero component, AIRMIC said it’s important to remember the “S” and the “G” aspects of the equation as well.

“Organizations have a responsibility to proactively embrace the social (the S) and governance (the G) aspects of ESG. Businesses that aren’t doing enough for racial, gender, and lesbian, gay, bisexual and transgender (LGBT) equality—or that are perceived as being complicit in undermining equality—have experienced consumer and government backlash,” AIRMIC continued. “These represent major reputational risks, and as investors and rating agencies become more attuned to ESG issues, [they] may have direct and immediate impact on the financial value of businesses.”

This article first was published in Insurance Journal’s sister publication, Carrier Management.

Top photograph: Image created with the use of artificial intelligence by Guy Bocca, vice president of Design, Wells Media Group.

Topics Underwriting