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ESG Compliance Focuses for Insurance Underwriting and Investment

2023.03.17 ZHU, He (George)NI, Tianling (Carey Nee)、CUI, Xiao、SUN, Jiping

Sustainable development has become a key global concern in recent years and countries are introducing new policies and regulations in response to the call for more sustainable development. At a global level, some initiatives and voluntary standards relating to environment, social and governance (ESG) have been gradually incorporated into regulatory policies, guidelines and requirements. For example, on June 1, 2022, to promote the development of green finance in China, the China Banking and Insurance Regulatory Commission (CBIRC) issued the Circular on the Guidelines for Green Finance for Banking and Insurance Sectors (Circular). This Circular incorporated core concepts of sustainable development into regulations for the business of insurance agencies, requiring them to integrate ESG concepts into their credit and investment business processes and risk management systems.  The Circular ensures ESG compliance for underwriting and investment businesses, with the aims of carbon peaking and carbon neutrality alongside high-quality development.

1. Why should insurance agencies consider ESG factors?

For insurance agencies, achieving ESG compliance in their underwriting and investment business is a mandatory requirement set forth in Chapter IV of the Circular. From a systemic risk control perspective, if insurance agencies, as major financial institutions, do not take into consideration the ESG concerns of proposed underwritten clients or proposed investment projects while in the process of underwriting and making investments, the future occurrence of major ESG events may affect the client’s solvency or project development. This may result in exposing insurance agencies to significant losses.

ESG factors may have a wide impact on insurance agencies and involve their underwriting business, the investment of insurance funds, etc. There is an urgent need to establish and promote the implementation of good assessment and control mechanisms. From an asset perspective, insurance agencies, like other financial institutions, need to manage ESG risks related to the value of their investment projects and to promote sustainable socio-economic development by increasing investment in green and low-carbon projects and supporting the transformation of traditionally high polluting and high energy-consuming enterprises. The underwriting side of an insurance agency can be significantly affected by ESG factors, for example, climate change may lead to severe environmental disasters, which in turn may result in property damage being borne by the insurance agency, increasing the probability of property damage claims and increasing the cost of underwriting.

2. How should insurance businesses integrate ESG factors?

According to the Circular, to achieve ESG compliance and risk management in underwriting and investment management processes, insurance agencies should consider the following :

(1) Before underwriting or making an investment, insurance agencies should conduct ESG due diligence or ESG compliance reviews for the client or project, based on its distinct industrial and regional characteristics. It is therefore necessary to establish an ESG risk assessment mechanism, and it is important to develop a checklist for due diligence in respect to ESG, a checklist for compliance documents and a checklist for compliance risk reviews considering the characteristics of the clients in different industries or proposed investment projects.

(2) When deciding to underwrite or invest in certain projects, insurance agencies should strengthen their ESG due diligence, fully identify the ESG risk level, and determine the reasonable underwriting and investment authority as well as the examination and approval processes. Underwriting or investing in clients or projects with previous serious legal violations and material risks in ESG should be restricted. Therefore, it is necessary to ensure that the appropriate personnel conduct due diligence, fully identify the material risks, and set up corresponding approval and reporting systems. Approval by higher level personnel is required for underwriting or investment projects, depending on the ESG risk level and it is recommended to incorporate ESG-related risk factors into product pricing or project valuation considerations, and manage risk with reasonable pricing and valuation.

(3) When entering agreements in connection with underwriting or investments, insurance agencies should incorporate ESG compliance requirements into the relevant provisions of the agreement and incorporate ESG into the sections for representations and warranties, conditions precedent, covenants and liability for breach of contract. For underwritten clients and investments involving material ESG risks, they should require the client or the investee to provide ESG risk reports in the text or annexes of the contract and enter the representation and undertaking provisions regarding strengthening the ESG risk management by the client or the investee  and the remedies in the event of default by the client or the investee in the management of ESG.

(4) After underwriting or providing investment funds, insurance agencies should continuously supervise the ESG management of the investee enterprises or projects. For insurance agencies, they should pay close attention to the impact of the internal and external environment on the client's or the investee’s operating conditions and industry development, strengthen dynamic analysis, conduct scenario analysis and stress testing, and make timely adjustments in terms of asset risk classifications, preparation and other aspects. They should also establish a reporting system for the occurrence of major ESG risks and link the results of such supervision with the allocation of underwriting or investment funds. For clients with potentially major environmental, social and governance risks, targeted improvement management measures should be formulated and implemented to reduce the economic loss caused by ESG-related risk events.

3. Suggestions

Given that the Circular requires insurance agencies to establish and optimize their internal ESG management systems and processes by May 31, 2023, we recommend that insurance agencies take action to establish internal ESG policies and systems as soon as possible. Insurance agencies should begin to implement the requirements of the Circular as soon as possible while granting credit and making investments. Insurance agencies may also seek assistance from ESG lawyers or consultants to deal with relevant matters. Please contact your ESG attorney to make amendments to the template agreement/commercial agreement of the relevant parts of the transaction documents to complete the integration of ESG elements.

If you have any questions regarding the Circular or need assistance in preparing ESG due diligence checklists, compliance document checklists, compliance risk review checklists, updating transaction documents or agreements, or carrying out ESG due diligence, please contact us at ecoenvpro@junhe.com. 

JunHe’s EHS and ESG Team:JunHe, with over 1,000 professionals, is one of China’s largest full-service law firms with a recognized international reputation for providing high quality legal services. As one of the pioneers in the practice area of ESG in China and with one of the largest teams of EHS lawyers in the country, JunHe provides clients with a full range of EHS and ESG legal services. JunHe is sustainability-oriented and provides EHS compliance audit services to enterprises across different industries. JunHe relies on different legal and professional compliance teams (including ESG, EHS, antitrust, labor and employment, intellectual property, trade and data, finance and tax, business, criminal compliance and other professional teams related to ESG) to provide ESG due diligence services in supply chain management and M&A matters and assists companies or third-party agencies in drafting ESG reports. Based on our experience in serving clients from different industries, we can provide specialized services for the daily operations of enterprises. These include specialized ESG-related legal and compliance and, as well as drafting and reviewing ESG-related terms and clauses in contracts with business partners, establishing and improving ESG systems, identifying  ESG disclosure requirements, green finance, and ESG training.

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