Insurers Targeted by State Anti-ESG Efforts in Texas and Beyond

Insurance companies operating in Texas would be restricted to some extent in how they consider ESG factors when setting rates under a measure sent to Gov. Greg Abbott (R).

The bill (S.B. 833) is among the latest legislative activity by red states limiting how companies use environmental, social, and governance factors such as climate change in their business decisions. Other Texas measures related to ESG in insurance shareholder proposals and retirement system investments didn’t receive final votes before the session ended Monday.

The legislation reflects a growing focus by GOP lawmakers on how limiting access to insurance could hamper the fossil fuel industry, in direct opposition to organizations calling for climate commitments from insurers. Republican attorneys general in a letter this month raised questions over the legality of a global alliance of insurers vowing to transition to net-zero greenhouse gas emissions by 2050.

Companies have been taken by surprise by the aggressiveness of state regulators toward ESG considerations in the past year or so, said Kahlil Williams, partner at Ballard Spahr LLP and co-leader of the firm’s ESG working group. The debate has companies weighing the costs, benefits, and consequences of ESG commitments, he said.

“At the end of the day, companies have harder decisions to make than they ever have about how much these sort of ESG principles really matter to them,” Williams said.

Insurance Input

In Texas, insurance industry representatives successfully pressed for significant changes to a bill they warned could have unintended consequences by prohibiting companies from considering ESG factors when establishing rates. The final version includes a host of exemptions—including that companies could consider the factors when they’re relevant and related to risk, as well as for ordinary insurance business purposes.

Insurers also wouldn’t be forced to substantially change their existing business plans. The bill instead states companies can’t use ESG factors to charge differing rates “for essentially the same hazard.”

“We don’t think that this will have a material impact on what my membership is doing,” said Beaman Floyd, director of the Texas Coalition for Affordable Insurance Solutions, whose members include Allstate Corp., Farmers Insurance, and State Farm Insurance.

The measure addresses industry concerns “to the maximum extent possible,” said Rep. Tom Oliverson (R), who pushed the House version of the legislation. The provisions distinguish between scenarios such as an insurer charging more for a homeowner policy in Tornado Alley—which would remain permissible—and a blanket policy impacting oil and gas companies based on environmental views, he said.

“That’s discriminatory, and that we’re not going to allow,” Oliverson said.

Legislation shouldn’t prevent insurance rating considerations that are actuarially valid, Jon Schnautz, assistant vice president of state affairs for the National Association of Mutual Insurance Companies, said in a statement. The bill isn’t necessary, but its final form “recognizes the critical connection between rate and risk,” he said.

Texas Democrats opposed the legislation and argued the state shouldn’t interfere with insurer business decisions. The measure stems from denying climate science, Rep. Erin Zwiener (D) said before the bill’s final passage.

“It is based on misconceptions that the insurance industry is trying to weigh in politically in their determinations about who they insure, when in fact what they are doing is good business sense in the face of a changing economy,” she said.

States Diverge

Texas could serve as a model for lawmakers elsewhere who want to harness the authority states have to regulate insurers within their boundaries, Oliverson said. Part of that push includes recommending the Texas policy to members of the National Council of Insurance Legislators, where Oliverson is president-elect, he said.

The organization has raised ESG issues this year as state approaches diverge. In contrast to the Texas bill, a Connecticut proposal would add a surcharge for carriers underwriting fossil fuel companies. The discussions are informational with no plans for model ESG policies, council CEO Tom Considine said.

“I don’t see any scenario where you’d be able to achieve consensus around model legislation nationally on ESG,” he said.

Insurance associations have warned against both pro- and anti-ESG policies. The Reinsurance Association of America, which worked with lawmakers on the Texas bill, opposes legislation that would restrict rating and underwriting freedom, Paul Martin, vice president of state relations, said in an email. The Texas measure includes “meaningful exceptions” to the ESG prohibitions, he said.

The American Property Casualty Insurance Association has opposed any legislative mandates on business models as a “potentially dangerous intrusion into the free market and one which will ultimately harm consumers,” Lee Ann Alexander, vice president of state government relations, said in a statement. The association opposes the Texas bill.

Climate Risk

ESG legislation beyond insurance has succeeded elsewhere. Laws signed this month in Indiana and Florida pose new restrictions on ESG factors in pension decisions, among other requirements.

Colorado’s sweeping new law signed this month to target net-zero greenhouse gas emissions by 2050 stands in contrast to those passed in other states. The measure will require some insurers to complete the National Association of Insurance Commissioners’ climate risk disclosure survey designed to increase transparency.

Additionally, the law will require the Colorado Public Employees’ Retirement Association to provide information about risks related to climate change in its annual investment stewardship report. Provisions related to proxy voting were amended out of the bill, but those conversations will continue next year, said state Sen. Chris Hansen (D), who led the legislative efforts.

“We really need to do a better job of reflecting climate risk in the pension approach,” he said.