Introduction
The IRDAI has recently introduced new regulations that significantly impact the way insurance companies operate in India. The IRDAI (Corporate Governance for Insurers) Regulations 2024 ("CG Regulations") and the IRDAI's Master Circular on Corporate Governance for Insurers 2024 of 22 May 2024 require all Indian Insurance Companies to have a Board-approved Environment, Social and Governance ("ESG") framework and monitor ESG activities. Similarly, the IRDAI's "Master Circular on Reinsurance" of 31 May 2024 extends these requirements to Branches of Foreign Reinsurers ("FRBs") and Lloyd's India.
Previously, ESG considerations were not mandatory for Insurers under the IRDAI regulations. The only environmental guidance involved requiring certain Insurers (fulfilling certain criteria in terms of turnover, net worth or profit) to form a Corporate Social Responsibility ("CSR") Committee and spend a minimum amount on CSR activities, as mandated by the Companies Act 2013 ("Companies Act")1.
This article discusses the evolution of ESG in India and the impact of these new requirements on the Indian insurance sector.
Evolution of ESG norms in India
ESG is a methodology that assesses a company's societal impact based on three factors:
- Environment: This includes a company's climate change related policies, greenhouse gas emissions, sustainability measures, and compliance with environmental regulations.
- Social: This considers a company's relationships with internal and external stakeholders, such as addressing employee safety and health and social issues like health awareness or disaster preparedness, including in underserved areas.
- Governance: This assesses a company's risk management framework, various forms of reporting/disclosures, accounting methods and diversity in leadership selection.
The concept of ESG can be traced back to the (erstwhile) Companies Act 1956, which required companies to report on energy conservation efforts to shareholders. The Ministry of Corporate Affairs ("MCA") further solidified the concept with the Corporate Social Responsibility Voluntary Guidelines ("CSR Guidelines") in 2009, which encouraged companies to allocate and spend a specific amount towards CSR activities and disclose to stakeholders.
Further, based on feedback from various stakeholders, the MCA issued the National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business ("NVG Guidelines") in 2011. These guidelines required companies to incorporate social and environmental considerations into their operationssuch as respecting and promoting human rights. In addition, the NVG Guidelines also specified a Business Responsibility Reporting framework for companies to demonstrate their compliance.
Following these developments, the Securities and Exchange Board of India ("SEBI") in 2012 mandated top listed companies to file Business Responsibility Reports as a part of their annual report, based on the NVG Guidelines. The scope of this requirement gradually expanded to encompass more companies. The Companies Act subsequently also formalized the requirement for companies to undertake CSR activities.
The MCA issued the National Guidelines on Responsible Business Conduct ("NGRBC Guidelines") in 2019 to align with international developments such as India's ratification of the Paris Agreement on climate change of 2016. The NGRBC guidelines introduced a revised Business Responsibility and Sustainability Reporting framework which was made applicable to top 1000 listed companies.
Impact on the Insurance Sector
The IRDAI's new regulations require all Insurers, including FRBs and Lloyd's India to have a Board/Executive Committee-approved ESG framework and monitor ESG activities. However, the extant IRDAI framework including the recently notified master circulars (on corporate governance and reinsurance) do not provide any specific guidance in terms of any activities to be undertaken, reporting/disclosures to be made or even the contents of the ESG framework.
Due to the ambiguity, it remains to be seen whether the IRDAI adopts existing MCA guidelines or creates new ESG norms for Insurers.
Depending on their implementation, the new regulations are likely to impact the insurance sector in some ways. Insurers are likely to place greater emphasis on identifying and managing ESG risks, such as those related to environmental risks and social issues. This may involve developing new risk assessment models and incorporating ESG factors into underwriting decisions. As an illustration, Insurers may offer discounts (i) on insurance products that incentivize sustainable practices (such as electrical vehicles) and/or (ii) to prospective companies with strong ESG practices. Another possibility is for Insurers to also design specific products that focus on any environmental damage caused by businesses.
ESG norms may also involve changes in investment strategies of Insurers, such as to consider a company's performance on ESG factors (in addition to existing investment metrics). This could involve divesting from companies with poor ESG practices and increasing investments in sustainable businesses and infrastructure projects.
At present, it remains to be seen how the IRDAI will provide specific guidance and how Insurers will look to adapting to these evolving requirements.
Footnote
1. The Companies Act set out an illustrative list of socially responsible activities that may be undertaken by a company to ensure compliance with §135 which includes activities related to ensuring environmental sustainability, ecological balance, and protection of flora and fauna etc.
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