This year started off with a surge of enthusiasm among US proponents of increased climate-related financial risk disclosure by insurers and others:
- Soon after the late-2021 Conference of the Parties (COP) 26 event in Glasgow, Scotland, the New York Department of Financial Services (NYDFS) finalized its climate change regulatory framework.
- The National Association of Insurance Commissioners (NAIC) completed the first full year of work by its Climate and Resiliency Task Force (Task Force), with several more states signing up to require insurers domiciled in their states to submit climate disclosure surveys modified to align more closely with the climate disclosure survey developed by the Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosure (TCFD).
- In March 2022, the US Securities and Exchange Commission (SEC) published its proposed climate change financial disclosure rules, borrowing some of the TCFD’s content and receiving many comments from interested parties in the ensuing months.
On the international front, development continued on a common language for climate change financial disclosures by the International Sustainability Standards Board (ISSB). All of this activity occurred against a steady drumbeat of announcements of new environmental, social and governance (ESG)-compliant investment funds, commitments from insurers to refrain from underwriting new and/or existing coal mining and similar ventures, and pledges from many companies—including insurers—with respect to emissions reductions and sustainability generally.
More recently, as the summer of 2022 wears on—with high temperatures and drought conditions in much of the country, wildfires proliferating in the western United States, recent deadly flooding in Kentucky, and the approaching peak of the Atlantic hurricane season—even climate change skeptics must be wondering if there isn’t something to this climate change phenomenon.
But as one commentator recently noted, the day that pro-ESG activity began is also the day that anti-ESG activity began. With this in mind, how should US insurers approach climate change financial disclosures for the remainder of the year?
US INSURANCE REGULATION
Where We Stand
The only state that continues to have a more-or-less fully developed climate change regulatory framework is New York. For insurers that are domiciled in New York—meaning that the NYDFS is the insurer’s primary solvency regulator—the NYDFS expects that as of August 15, 2022, affected insurers will have begun to incorporate climate change into governance structures and enterprise risk management processes with board-level supervision and senior management support.
The NYDFS will monitor insurer compliance by examining responses to the NAIC’s recently revised climate disclosure survey (again, revised earlier this year by the Task Force to align more closely with the TCFD format). The NAIC pushed back the submission of responses to its climate disclosure survey to November 30, 2022, and New York has also agreed to the delay (along with the 14 other states that require domestic insurers to complete the survey). Apparently, the NYDFS has also sent requests for information (RFIs) to insurers that are not required to submit responses to the NAIC survey.
As noted above, the NAIC progressed to the extent of revising its Climate Disclosure Survey earlier this year. More precisely, it was the NAIC’s executive committee that revised the survey, not the full membership (see below for more on “red” vs. “blue” state divergence with respect to climate change disclosure requirements), and, practically speaking, that is the sum total of the progress that the NAIC has made.
Specifically, at the NAIC’s August 2022 Summer National Meeting in Portland, Oregon, the Task Force convened to listen to reports of activity by its five subgroups: climate risk disclosure, solvency, innovation, technology and pre-disaster mitigation. There was scant activity to report, apart from some progress in developing proposed edits to the NAIC’s Financial Condition Examiners Handbook (which will need to be considered for adoption by other NAIC committees) and planning for meetings later this year to explore the possible use of scenario analyses (e.g., the Bank of England’s Climate Biennial Exploratory Scenario (CBES) exercise) by regulators and insurers.
Where We May Be Headed
Given the extended, November 30, 2022, deadline for submission of NAIC climate disclosure reports, it is unlikely that the NAIC and state regulators will be able to analyze responses until sometime in 2023, even assuming that regulators decide to use a new service of an artificial intelligence/machine learning (AI/ML)-powered climate change disclosure analysis algorithm that Ceres’ Executive Director Steve Rothstein mentioned during a brief August 2022 presentation to the Task Force. Ceres is apparently testing out the software on 28 TCFD reports filed via the California Department of Insurance last year.
At the NAIC level, by year-end 2022 it seems unlikely that the Task Force and its various workstreams will have made significant progress on developing either an overarching climate risk regulatory framework or discrete portions of a framework. There will be new NAIC leadership in 2023 (when Chlora Lindley-Myers, director of the Missouri Department of Insurance, replaces Dean Cameron, director of the Idaho Department of Insurance, as NAIC president) but not until 2024 (when Connecticut Insurance Commissioner Andrew Mais takes office as president) will there be a strong proponent for climate change risk advances. One variable that could prompt the NAIC to move a bit more quickly in 2023, however, will be what the Federal Insurance Office (FIO) says in its gap analysis report on state progress on climate-related issues that is due to be published by the end of 2022.
Nevertheless, it seems highly unlikely that the NAIC as a whole will take the bull by the horns and follow the lead of New York. But will other states follow New York’s lead and proceed to develop the same or similar regulatory frameworks to guide insurers in integrating climate change risk into existing enterprise risk management processes?
The answer in Republican-controlled (red) states is almost certainly “no.” We have seen multiple examples of red-state governors, treasurers and attorneys general firing warning shots across the bows of certain asset managers and banks hoping to manage state pension and other funds or handle local bond issuances. If asset managers and bankers have been too public in their pledges to cease investing in coal, oil and gas projects or too vocal about the use of ESG factors in making investment decisions, they cannot expect to be awarded new contracts and assignments. Most recently, in late July, West Virginia State Treasurer Riley Moore published the state’s first Restricted Financial Institution List, disqualifying five financial institutions from being awarded state banking contracts. Larger states (e.g., Florida and Texas) are in the West Virginia camp. It seems unlikely that state insurance commissioners (at least those appointed by governors in the states just mentioned) will be thinking about subjecting domestic insurers to mandatory climate change disclosure standards.
There are multiple variables, apart from 2022 US election outcomes, that could alter red-state positions on climate change generally. First, natural catastrophe events or conditions of one sort or another can change views. Second, economic activity (e.g., new electric vehicle assembly plants, new battery factories, new renewable energy projects), all of which will proliferate during the balance of this decade thanks to the Inflation Reduction Act of 2022 (IRA) that both houses of US Congress have now approved, may change minds. Third, expanded tax breaks in the IRA for individuals and businesses acquiring electric vehicles or installing renewable power equipment will also change minds. Fourth, geopolitical events that cause spikes in the price of oil could prompt changes as well.
FEDERAL SECURITIES REGULATION
As mentioned briefly above, and as is well known by now, a divided SEC (where the two Republican commissioners have repeatedly expressed their opposition to the current climate change risk disclosure proposal) will presumably publish a final climate change risk disclosure regulation by the end of 2022 or early in 2023 at the latest. If comments from 24 attorneys general from red states, characterizing the SEC’s proposed rule as “an ill-advised misadventure into environmental regulation,” are any guide, it is nearly certain that once the SEC does publish a final version of its regulation there will be multiple lawsuits filed by various parties in an effort to prevent the proposal from becoming effective.
Whether red states, SEC-registered companies or other interested parties will be filing suits remains to be seen, of course. However, these suits will take years to conclude and one or more may well wind up before the Supreme Court of the United States that, at the end of its 2021–2022 term, delivered a decision in West Virginia v. Environmental Protection Agency (No. 20-1530, decided June 30, 2022) that opponents will likely cite as support for the proposition that, for the SEC, the comprehensive climate change disclosure proposal is a bridge too far. Opponents consider such a proposal as a “major question” that our elected representatives, not an administrative agency itself, ought to be addressing absent “clear congressional authority.” Regardless, some—perhaps many—of the roughly 110 insurers that are SEC registrants will either continue or decide to begin preparing and publishing NAIC or TCFD-type climate risk financial disclosures that SEC staff will be scrutinizing in the future.