New York State Department of Financial Services Makes Good on Its ESG Commitments

There have been numerous indications that we may soon see environmental, social and governance (ESG)-related requirements for financial institutions from the federal government, but state regulators may also play a role in the transition to a more sustainable financial system. Recently, the New York State Department of Financial Services (DFS) published guidance outlining its expectations that New York-regulated insurers take steps to manage climate change risk and develop meaningful diversity, equity, and inclusion initiatives. 

Climate Change Guidance for Insurers

On March 25, 2021, DFS announced proposed guidance it expects New York insurers to follow to manage climate change financial risk. While climate change poses significant risk to the financial system in general, the proposed guidance noted the unique position of insurers because the physical and transition risks of climate change affect both insurers’ assets and liabilities and because insurers are experts at pricing risk.

DFS cited the disproportionate affect climate change has on low income communities and communities of color and urged insurers to take steps to mitigate climate change’s role in social inequality. DFS’s guidance requires insurers to assess and manage current and forward-looking risks. DFS’s expectations include: 

• Integration of climate risk into an institution’s governance structure
  
• Consideration of the impact of climate-related factors on the business environment in strategic and business decisions
  
• Incorporation of climate risk into insurers’ risk management frameworks
  
• Use of scenario analysis to inform business strategies and risk assessment and identification
  
• Disclosure of climate risks
  

DFS expects insurers’ ability to manage climate risks to become more sophisticated over time. DFS plans to provide a timeline for insurers to implement the requirements set forth in the proposed guidance.

Diversity, Equity, and Inclusion in the Insurance Industry

Following a trend playing out throughout the financial services industry, the DFS’s focus on the climate element of ESG is not to the exclusion of the “S” of social issues. Early March, DFS issued Insurance Circular Letter No. 5, “Diversity and Corporate Governance,” in which it notes commitments made by many insurers to increase the diversity of their workforces, but also urges insurers to “move beyond words and good intentions to actions and real change.”

Citing research supporting the business case for increased diversity and statistics highlighting the lack of women and people of color in the insurance industry at the C-suite level, DFS expressed its expectation that New York-regulated insurers make diversity of their leadership a business priority and key element of corporate governance. Noting the importance of transparency in facilitating change, the agency announced that it will begin to collect and publish data relating to diversity of insurers’ corporate boards and managers, which it sees as essential to companies’ ability to identify weaknesses, set goals, and measure progress. Starting in 2022, DFS’s examination process will include questions about diversity-related efforts.

DFS has previously signaled its commitment to ESG principles, and these issuances are further support of that commitment. If New York-regulated financial institutions are not already engaging with ESG issues, they should start soon.