ESG related developments in the insurance space

Truth be told, you would probably be forgiven for thinking that the only newsworthy development on environmental, social and governance (“ESG”) considerations in the insurance industry these past few months revolved exclusively around the notorious Sustainable Finance Disclosures Regulation (“SFDR”) – particularly, the Level 1 Requirements incumbent on select insurance undertakings (namely life insurers) and intermediaries as of the 10 March 2021.

Despite the initial furore, it would seem that the local life insurance market is yet to truly come to grips with the SFDR’s expectations, but time is evidently running out. Many will have heard of the MFSA’s Request for Information (“ROI”) issued via circular dated 30 July 2021, whereby the Authority is expecting all financial market participants and financial advisers (as defined under the SFDR) to disclose the extent of their efforts to comply with the SFDR and ESG considerations generally, by the 10 September 2021. For those who may not have heard, this hyperlink may be of interest.

Shifting our focus away from the SFDR, many matters of interest have been brewing under the radar for a number of weeks and months. This article seeks to shed some much-deserved light on two of these less glamorous developments.


On the 19 April 2021, the European Insurance and Occupational Pensions Authority (“EIOPA”) issued an opinion addressed primarily to the various national competent authorities within the European Union regarding supervision of the use of climate risk scenarios in the Own Risk and Solvency Assessment (“ORSA”) prepared by authorised (re)insurance undertakings as part of their routine statutory obligations. This follows the publication of a draft Commission Delegated Regulation intended to amend Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (“Solvency II”) so as to integrate sustainability risks into the governance frameworks of insurance and reinsurance undertakings going forward (the “Draft Amending Regulation”).


EIOPA immediately sets out the rationale behind the issuance of its Opinion (and the changes introduced by the Draft Amending Regulation) in the first few introductory paragraphs – noting that climate change constitutes a serious risk for society at large and that its increasing detrimental impact on the planet will not only raise the underwriting risk of undertakings but will also impact their asset values and further challenge their business strategies generally.

Interestingly, however, EIOPA also considers the other side of the coin – i.e. that shifting to a zero-carbon economy poses considerable transition risk, in that it may seriously depress investments in carbon-intensive sectors. This in turn may induce higher legal claims on companies that fail to consider the impact of climate change – thereby affecting (re)insurance undertakings directly (or indirectly) via their underwriting of legal liability risks.

What is being proposed

Given that the (re)insurance industry will be impacted by climate change-related physical risks (i.e. risks arising from the physical effect of climate change, which will invariably lead to an increase in claims), and transition risks (i.e. risks which arise from the transition to a low-carbon and climate-resilient economy, which will render carbon-oriented investment strategies unsustainable, and various related assets redundant), EIOPA recognises that these risks must be managed in the short to long term. Consequently, it is being proposed that (re)insurance undertakings not only identify in their ORSA material climate risk exposures but also subject those material exposures to a risk assessment. This, in turn, will aid strategic planning and business strategy going forward.

The Opinion notes that the aforementioned assessment of material exposures shall be based on qualitative and quantitative analyses, and in so far as a (re)insurance undertaking were to conclude that climate change is not a material risk to its operations, then an explanation must be provided in order to determine how that conclusion has been reached. Assuming that a (re)insurance undertaking has identified climate change as constituting a material risk, the Opinion contends that competent authorities should expect said undertaking to subject that risk to at least two long term climate scenarios in its ORSA. The Opinion provides for two scenarios of its own – namely:

  1. a climate change risk scenario where the global temperature increase remains below 2°C (preferably no more than 1.5°C) in line with EU commitments; and
  2. a climate change risk scenario where the global temperature increase exceeds 2°C.

This notwithstanding the Opinion notes that (re)insurance undertakings may develop their own climate scenarios, or rather, utilise any of a number of scenarios released by the Network for Greening the Financial System in June 2020.

The Opinion specifies that EIOPA will start monitoring the implementation of its contents by the competent authorities (including, therefore, the MFSA) two years after its publication (i.e. on 19 April 2023).



On the 21 April 2021, the European Commission adopted Commission Delegated Regulation (EU) 2021/1257 (the “Amending Delegated Regulation”), which is geared towards amending Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359 (dealing with product oversight and governance requirements for insurance undertakings and insurance distributors and information requirements and conduct of business rules applicable to the distribution of insurance-based investment products (“IBIPs”), respectively) so as to integrate sustainability factors, risks and preferences therein.

The recitals to the Amending Delegated Regulation clarify that in order to increase investor demand for sustainable investments, sustainability factors and sustainability-related objectives must be considered by the manufacturers of insurance products (be they insurance undertakings or intermediaries) as part of their product governance requirements.

Additionally (in a separate but related context), in order to maintain a high level of investor protection, sustainability factors should also be taken into account by insurance undertakings and intermediaries which distribute IBIPs as part of their duties towards their customers (and potential customers).

What does this mean?

The Amending Delegated Regulation makes it incumbent on manufacturers of insurance products to be in a position to identify which specific group/s of customers insurance products ought to be distributed to on the basis of any particular sustainability-related objectives they might possess. In other words, the product approval process of insurance manufacturers shall for each insurance product identify a target market, as well as a group of compatible customers to whom the products in question shall be distributed. To this end, the members of staff involved in designing the insurance products must possess the necessary expertise to properly understand the product being sold, as well as the sustainability-related objectives of the target market to which that particular product is being distributed.

Further to the above, the Amending Regulation also focuses on the distribution of IBIPs, and notes that in order to maintain a high level of investor protection, insurance undertakings and/or intermediaries distributing IBIPS should, when identifying conflicts of interest, be able to suss out any conflicts which stem from the integration of a customer’s particular sustainability preferences. More so, insurance undertakings and/or intermediaries that provide advice in relation to IBIPs should be able to recommend suitable IBIPs to their customers and/or potential customers based on their sustainability preferences, and must therefore be able to ask relevant questions in order to identify those preferences.

The Amending Regulation emphasises that the inclusion of sustainability factors in the advisory process referred to above must not lead to miss-selling, or rather, the misrepresentation of IBIPs as fulfilling sustainability preferences where they do not. It is therefore crucial that any recommendation/s made to customers is/are based on a number of factors applied as a whole, including not only the sustainability preferences expressed, but also the particular customer’s financial and investment objectives, as well as his/her individual circumstances, generally.

The Amending Regulation came into effect on 22 August 2021, and shall be applicable as of 2 August 2022.

Should you have any questions regarding the contents of this article and/or ESG and its applicability to the insurance industry generally, please do not hesitate to contact the author at or Dr. Matthew Bianchi at