New IRDAI regulations force Indian insurance sector to adopt ESG practices

The Insurance Regulatory and Development Authority of India (IRDAI) has introduced new regulations requiring all insurance companies, including overseas branches and Lloyd’s India, to take into account environmental, social and governance (ESG) issues in their operations.

Before these regulations, Indian insurance companies were not required to consider ESG factors. The only environmental guidelines existed under the Companies Act, 2013, which required some insurers to set up a corporate social responsibility (CSR) committee.

ESG is a framework for assessing a company’s social impact in three key areas:

Environment: These include factors such as climate change policy, greenhouse gas emissions and compliance with environmental regulations.

Social: The company’s relationships with its employees and communities are taken into account, including issues such as employee well-being and social responsibility initiatives.

Management: This assessment covers the company’s risk management structure, transparency of reporting and diversity in the management team.

The concept of ESG in India can be traced back to the Companies Act, 1956, along with subsequent guidelines and regulations by the Ministry of Corporate Affairs (MCA), which promoted social responsibility and environmental considerations in businesses.

The new IRDAI regulations require all insurers to develop and monitor an ESG framework approved by their board or executive committee. However, the details of implementation are yet to be clarified. This ambiguity creates uncertainty as to whether the IRDAI will adopt existing guidelines or establish new ones for the insurance sector.

These new regulations will likely impact the insurance industry in several ways:

Risk management: Insurers can prioritize identifying and managing ESG risks, potentially leading to new models for assessing risks and incorporating ESG factors into underwriting decisions. This could include offering discounts for sustainable practices or designing products that address the environmental damage companies cause.

Investment strategies: ESG standards can influence investment decisions, prompting insurers to consider a company’s ESG performance alongside traditional financial metrics. This can lead to divestment from companies with poor ESG practices and more investment in sustainable businesses.

The insurance sector is awaiting further guidance from IRDAI on how to implement these new regulations. This will determine how insurers will align and integrate ESG practices into their core operations.