ESG Weekly Update – March 30, 2022

30 March 2022

US: NAIC Climate and Resiliency Task Force Adopts Revised Climate Risk Disclosure Requirements

Last week, the National Association of Insurance Commissioners (“NAIC”) Climate and Resiliency (EX) Task Force voted to adopt a new form of the NAIC Climate Risk Disclosure Survey, which closely aligns with the Task Force on Climate-Related Financial Disclosures’s (“TCFD”) recommendations. The Task Force had previously published revisions to the existing survey in November 2021 and held meetings earlier this year to hear and discuss public comments. The proposed revisions will be voted on at the next NAIC national meeting in April 2022 before they are officially implemented, but the Task Force has signaled that insurers should plan for such expected changes.

The prior survey consisted of eight questions and has been administered annually since 2010 by several states (including New York). Insurers collecting a minimum of $100 million in annual premiums are required to answer the survey. The NAIC estimates that 80% of the insurance industry provides public disclosure under the survey. The prior survey’s questions centered around insurer strategy and preparedness in investment, mitigation, emissions and engaging consumers.

The new survey contains more detailed and expansive questions in line with TCFD recommendations. It consists of a mix of long-answer and closed-answer questions. This move to a TCFD-aligned survey would be beneficial for cross comparisons as the TCFD standards are increasingly used around the world, and the requirements may also present a marketing opportunity for insurers looking to attract ESG-conscious customers. On the other hand, the new requirements may increase expenses and litigation risk for insurers and potentially give rise to government examinations, questions or prosecutions.

For further information, please see our Debevoise In Depth article at this link.

EU: EU Agrees to Introduce Carbon Tax on Imports of Highly-Polluting Goods

The Council of the European Union (EU) has reached an agreement on introducing a Carbon Border Adjustment Mechanism (“CBAM”). The CBAM regulation aims to eliminate “carbon leakage” by targeting carbon-intensive products such as cement, aluminium, fertilizers, electric energy production, iron and steel. From 2026, imports of such products will be subject to an additional tax calculated on the weekly average price of Emissions Trading System auctions, the EU’s carbon market. Importing companies will need to apply to a central registry established at the EU level.

By introducing the tax, the EU seeks to prevent offsetting efforts to curb greenhouse gas emissions through the import of products manufactured in countries outside the EU that do not have climate change policies on par with Europe’s. Once a non-EU country adopts a national carbon pricing system linked to the EU’s, imports of their goods will no longer be subject to the CBAM tax.

In order to enter into force, the CBAM regulation must be approved by the European Parliament.

Council of the European Union press release
Regulation establishing a carbon border adjustment mechanism

Global: World Bank Issues First Wildlife Conservation Bond

The World Bank has issued a five-year Wildlife Conservation Bond – the so-called “Rhino Bond” – with the goal of reversing the decline in the black rhino’s population in South Africa, which has fallen by 96% in recent decades.

The issuance aims to raise $150 million, with investors set to receive a return between 3.7% and 9.2% if the bank’s conservation objectives are met. The bank confirmed that no returns would be achieved if the population did not change or if it declined further. The black rhino population will be monitored in two South Africa reserves, the Addo Elephant National Park and the Great Fish River Nature Reserve; rhino population numbers will be calculated by Conservation Alpha, an environmental services company, and verified by the Zoological Society of London.

Through the Rhino Bond, investors will be indirectly financing activities to protect the species and will also create jobs related to the conservation effort. In lieu of coupon payments, investors will receive a performance-related payment on maturity, paid by the International Bank for Reconstruction and Development with a grant from the Global Environment Facility, in addition to the principal of the bond. This represents a new approach in conservation financing, shifting the risk of the project onto capital market investors. Credit Suisse was the sole bond structurer and joint bookrunner with Citibank.

World Bank announcement
Credit Suisse press release