ESG “an integral part of insurance value-chain” says Aegis underwriter

ESG performance had become an integral part of the insurance value-chain which insurers ignore at their peril, according to Jonathan Humm, Class Underwriter for Hull and War at AEGIS London, writing in broker Gallagher’s Marine Hull & Machinery and War Risks Market Report, July 2021.

However, Humm said that insurers needed to be wary of “over-committing resource in inefficacious pursuits”.

He noted that there was no rulebook on how to approach ESG matters; there was rather an understanding that something needed to be done, urgently.

For insurers – who to cover, how much cover to provide, in what form, and the methods used to provide it, were all in the spotlight and the industry introspection would only increase as both internal and external assessments on ESG performance intensified, said Humm.

The responsibility to find solutions to sustainability challenges lay beyond the traditional underwriting model.

Maritime businesses were taking action both proactively and as a reaction to the ever-changing regulatory landscape, but it was important to remember that companies competing within a given marketplace had competing interests, said Humm, noting that ESG was not distinguishable as a topic in its own right. It was an increasingly influential facet of modern business dealings and its three prongs shouldn’t be looked at in isolation.

Humm warned that the potential pitfalls of incorrect policymaking were well-documented. “Over-emphasise the impact on your business and any corrective action taken may destabilize the existing business model or the market in which a company operates”. However, if you underestimated the importance of these issues, a company ran the risk of being accused of tokenism or ‘greenwashing’.

For Marine Underwriters ESG issues were never far from the spotlight. Decarbonization had been on the agenda for many years; as the various deadlines loomed the calls for action intensified.

Discussions around ESG were now much further-reaching than simply focusing on decarbonization, Humm noted. “The complexity of these discussions and the need for a response from insurers led the Joint Hull Committee to form an ESG group to advise on such matters. As a member of this, I am fortunate to have a guiding role in the action the committee takes. Our stated purpose is: “To support Marine insurers by providing information on relevant ESG issues for our industry and where possible assist Marine insurers and their stakeholders with their ESG transition”. Whilst this is understandably insurer-focused, the breadth of the subject-matter in scope necessitates that the group consider views from a much wider set of stakeholders.” ESG goals for companies often dovetailed with common industry goals and indeed their success was predicated on collective action across sectors. It was important not to consider these issues nor undertake any work in isolation. “As insurers, we should be looking to support our clients wherever possible on their journey towards sustainable shipping”, said Humm.

At the inaugural meeting the first point agreed on was that the ESG group would likely never disband. Almost all current Maritime discussions would have an ESG element to them going forward. It was therefore important to concentrate on issues that the ESG Group was able to influence, rather than the wider and sometimes elusive concept of “ESG” itself. Humm said that ESG was not a goal per se, and the breadth of the subject required one to take just as much notice of what one can’t affect directly as what one can.

With a focused approach in mind, the ESG group decided to focus on three main areas initially – Marine Fuels, Vessel Recycling and Illegal Fishing.

Marine Fuels

Humm said that the IMO’s target to halve greenhouse gas (GHG) emissions by 2050 was looking increasingly difficult to achieve without urgent action.

A significant shift was required towards lower or even zero-carbon fuels by 2050, in order to have a chance of meeting the IMO target. There were also more pressing regulation-backed targets that would be implemented as soon as 2023. The IMO GHG strategy includes regulatory tools such as mandatory design requirements (EEDI) for new ships to adhere to carbon intensity requirements and energy efficiency plans (SEEMP) to improve the efficiency of all ships.

Humm noted that new vessels by definition should have fewer problems than older tonnage, so it was beholden on the insurance industry to work with the stakeholders involved in ‘at risk’ tonnage to achieve compliance within the stated deadlines. This needed to be supplemented by a reduction in demand for Marine bunker oil and associated improvements in fuel efficiency. Humm said that the JHC ESG group had reached out to Marine Surveyors, amongst others, and would continue to work with Shipowners wherever possible to ensure interim targets were within reach and compliance could be achieved. “It is up to the industry to provide the necessary insurance framework for this to take place”, Humm said.

Ship / Vessel Recycling

Humm noted that debate had intensified in recent years as to the best method of incentivizing stakeholders to recycle Maritime assets in a sustainable way. Some 70% of the world’s tonnage sailed for recycling whilst still covered under existing H&M and P&I policies. But the other 30% of vessels made their way to the yards via third-party ship recycling specialist companies that make their own arrangements for Hull and P&I insurance.

Humm said that the two paths presented different sets of risks for those insurers involved in this final voyage.

The Hong Kong Convention was adopted by the IMO in 2009, in order to minimize industrial accidents and environmental pollution when ships were dismantled. Ratification was currently underway in various countries, but progress had been “laboured”.

From December 31st 2018 EU-flagged commercial vessels above 500 gt had to be recycled in safe and environmentally sound ship recycling facilities that were included on the European List of approved ship recycling facilities.

However, there was currently not enough capacity at EU-approved yards to handle the current demand for vessel recycling. Conversely, there remained a huge supply of yard space on the Asian subcontinent, which is where 90% of the world’s tonnage is currently recycled.

“Whilst it may be convenient to highlight some of the unacceptable practices that have occurred in the past in certain yards/ geographies, standards are improving as countries adopt Hong Kong compliant practices”, said Humm.

According to GMS, the world’s largest ‘cash buyer’ of ships for recycling some companies, like Maersk, demanded higher standards from yards (in the Asian subcontinent) and were willing to accept lower scrap prices as a result.

Humm said that this was to be encouraged if the demand for recycling yard space was to be met sustainably. The EU capacity could not cater for this alone.

He said that the ESG group had engaged with key stakeholders on this complicated topic to ensure that progress can be made, ships were recycled in a safe and environmentally sensitive way and in line with relevant rules and regulations.

“Bilateral agreements will be needed between the EU and non-EU recycling countries to agree on how best to address the glut of recycling supply with yard space operating in a sustainable and environmentally-sensitive manner”, said Humm, noting that AqualisBraemar was also working with the JHC ESG group to focus on the development of the Inventory of Hazardous Materials now needed on EU vessels.

Illegal, Unreported and Unregulated (IUU) fishing

Humm said that about 20% of fish were caught illegally according to Oceana, an organization dedicated to the protection of our oceans. IUU fishing had a devastating impact on Marine ecosystems. Humm said that the ESG group intended to work with Maritime stakeholders to use available insurance levers to help subvert this practice.

He noted that insuring vessels associated with IUU fishing carried with it significant moral hazard, so it stood to reason that insurers themselves would want to avoid this wherever possible. “That said, it is up to the insurance industry to ensure that monitoring procedures are as accurate and up-to-date as possible to enable us to detect vessels or assureds of concern”, said Humm.

ESG issues abound in the Marine Insurance space and the conversation is getting louder. The work of the JHC ESG group will add to the voice of insurance stakeholders during discussions of these crucial and often conflicting subjects, and it will be a great privilege to help shape the debate in the years to come, concluded. Humm, AEGIS London.

AEGIS Syndicate 1225 was created originally to provide global insurance facilities for AEGIS Mutual members but today writes a diversified book of over 20 lines of business serving members and non-members alike. AEGIS London offers specialist expertise and leadership to clients in more than 180 countries, working with a broad range of industry groups. It is consistently within the top-quartile performing Syndicates at Lloyd’s.