India's insurance industry is undergoing a shift towards environmental and social responsibility. New regulations require insurers to consider ESG factors, potentially impacting risk management, investments, and product offerings
The Insurance Regulatory and Development Authority of India (IRDAI) has introduced new regulations mandating all insurance companies, including foreign branches and Lloyd's India, to integrate environmental, social, and governance (ESG) considerations into their operations.
Prior to these regulations, Indian insurance companies were not obligated to consider ESG factors. The only environmental guidance existed under the Companies Act 2013, which required certain insurers to form a Corporate Social Responsibility (CSR) committee.
ESG is a framework for assessing a company's societal impact across three key areas:
Environment: This includes factors like climate change policies, greenhouse gas emissions, and adherence to environmental regulations.
Social: This considers a company's relationships with employees and communities, encompassing issues like employee well-being and social responsibility initiatives.
Governance: This assesses a company's risk management framework, transparency in reporting, and diversity within leadership.
The concept of ESG in India can be traced back to the Companies Act 1956, with subsequent guidelines and regulations from the Ministry of Corporate Affairs (MCA) promoting social responsibility and environmental considerations within businesses.
The IRDAI's new regulations require all insurers to develop and monitor an ESG framework approved by their board or executive committee. However, the specific details regarding implementation are yet to be clarified. This ambiguity creates uncertainty about whether the IRDAI will adopt existing guidelines or establish new ones for the insurance sector.
These new regulations are likely to influence the insurance industry in a number of ways:
Risk Management: Insurers may prioritise identifying and managing ESG risks, potentially leading to new risk assessment models and incorporating ESG factors into underwriting decisions. This could involve offering discounts for sustainable practices or designing products tailored to environmental damage caused by businesses.
Investment Strategies: ESG norms might influence investment decisions, prompting insurers to consider a company's ESG performance alongside traditional financial metrics. This could lead to divestments from companies with poor ESG practices and increased investments in sustainable businesses.
The insurance sector awaits further guidance from the IRDAI on how these new regulations will be implemented. This will determine how insurers adapt and integrate ESG practices into their core operations.