ESG and Underwriting: From Greenwashing to Risk Selection

I.ESG, from Posture to Materiality

A notion that entered underwriting

In a decade, environmental, social and governance criteria, grouped under the acronym ESG, have established themselves in underwriting practice. According to a Marsh report, around 75% of insurers in the British and European markets are developing guidelines to integrate ESG into risk assessment, and 63% consider that a favorable ESG profile can affect the terms offered to a company, through improved policy terms or a reduced premium¹. The United Nations Environment Programme has even published, within its Principles for Sustainable Insurance, a first global guide to integrating ESG risks into underwriting, covering a very broad scope ranging from climate change to corruption by way of child labor². ESG is therefore no longer a peripheral concern, it has become a claimed component of the trade, to the point of now figuring among the ordinary criteria of risk analysis.

Regulatory pressure that has turned divergent

This integration does not stem only from a choice by insurers, it has been powerfully encouraged by the regulator, at least in Europe. The prudential framework and the non-financial disclosure obligations have made the consideration of sustainability risks a requirement, and no longer an option, compelling insurers to document the climate exposure of their portfolios. But this regulatory pressure, long convergent between the two shores of the Atlantic, has begun to diverge sharply, Europe holding the course of constraint while the United States began a retreat. This divergence is a structuring fact for a globalized insurance market, for the same group may be required to integrate ESG by its European regulator and dissuaded from doing so by the American legal environment, an uncomfortable situation that the rest of the analysis will illuminate, for it stems less from a real contradiction than from a confusion about the nature of ESG.

Two justifications in tension

This rise nonetheless rests on two distinct, and partly contradictory, justifications, which it is important to untangle. The first is a justification of values, which makes the insurer an agent of the transition, refusing to cover certain activities deemed harmful for moral or environmental reasons. The second is a justification of materiality, which sees in ESG criteria mere predictors of loss, in the same way as a driver's age or a building's soundness. These two foundations coexist in the sector's discourse, but they have neither the same solidity nor the same legitimacy. The whole recent evolution of ESG in underwriting can be read as a gradual passage from the first register to the second, from displayed posture to actuarial selection, a movement that the 2025 backlash brutally accelerated.

II.The Greenwashing Side, When ESG Is a Posture

Display as a signal

In its values register, ESG first functioned as a reputational signal. Insurers published carbon-neutrality commitments, joined climate alliances and drew up exclusion lists for certain activities, from coal to controversial weapons, all gestures intended to display responsibility. Non-governmental organizations also maintained constant pressure for these commitments to be followed through, demanding transition plans aligned with a limited warming trajectory and watertight against the charge of greenwashing³. Yet it is precisely the declarative nature of these commitments that is their weakness, for a public commitment creates an expectation, and the gap between the expectation and reality itself becomes a source of risk, for the insured company as for the insurer that has itself committed.

From greenwashing to greenhushing

This fragility materialized in the form of a growing litigation risk. Greenwashing, which consists in overstating one's sustainability efforts, has become a leading ground for legal action, and by early 2025 watchdogs had counted more than one hundred and fifty greenwashing class actions filed in the United States since 2015, with California and New York in the lead⁴. These actions often target directors' liability, and raise delicate coverage questions, depending on whether the misleading presentation is judged negligent, and therefore potentially covered, or intentional, and therefore excluded⁵. By a pendulum effect, the fear of such suits has generated the opposite phenomenon, greenhushing, by which companies now keep silent about their sustainability commitments to avoid being attacked, at the risk of disappointing other stakeholders⁶. Posture-based ESG is thus caught in a vice between the charge of doing too much and that of doing too little.

III.The 2025 Backlash

The political and legal fragmentation

The year 2025 dealt a severe blow to values-based ESG. In the United States, the movement experienced a marked retreat, against a backdrop of legal fragmentation and political contestation. The Tennessee attorney general obtained a settlement with asset manager BlackRock in which he saw the end of the ESG moment, a Texas federal judge held that an airline had breached its duty of loyalty to plan members by letting ESG considerations guide the investment decisions of its retirement plan, and the Securities and Exchange Commission declined in March 2025 to defend its own climate disclosure rules, adopted a year earlier⁷. A federal administration openly hostile to climate constraints completed this retreat, creating a fragmented landscape where pro and anti ESG state mandates coexist, and where the company finds itself ordered to obey contradictory injunctions simultaneously⁸.

The insurer ordered to pick a side

For the insurer, this reversal revealed the danger of an ESG anchored to a political consensus. As long as environmental commitment was the object of broad agreement, displaying it was without risk, but once that consensus fractured, every position became divisive. Refusing to insure a polluting activity can now be attacked as an illegal boycott in certain states, while insuring it without reservation can draw criticism in other jurisdictions. The insurer that had founded its approach on values thus finds itself ordered to pick a side in a political quarrel that is not its own, and exposed on all sides. This misadventure teaches that ESG, as a moral posture, is a fragile construction, hanging on a consensus that can come undone, and that a more solid footing must be sought elsewhere.

When the insurer's own commitments turn against it

The danger is not limited to underwriting, it reaches the insurer in its own declarations. By joining carbon-neutrality alliances and publishing divestment targets, several large insurers and reinsurers exposed themselves to crossfire. On one side, US state attorneys general saw in these alliances a possible anticompetitive collusion aimed at depriving certain industries of insurance, which precipitated the departure of many members from these coalitions. On the other, environmental organizations denounced the gap between the displayed commitments and the underwriting actually maintained in fossil fuels, in turn feeding a reputational and litigation risk. The insurer thus found itself caught in the net it had helped to set, its own sustainability commitments becoming a source of exposure, the most complete illustration of the fragility of an ESG founded on declaration rather than on the measurement of risk.

IV.The Materiality Side, ESG as a Risk Predictor

The only sound justification

This more solid footing exists, and it is financial materiality. Some ESG criteria are not moral preferences, but proven indicators of future loss, and it is on that basis that they fully have their place in underwriting. Weak governance heralds fraud and D&O claims, heavy exposure to fossil fuels heralds risks of transition, litigation and asset depreciation, a polluting practice heralds environmental liabilities. From this perspective, integrating ESG into underwriting is nothing other than doing the insurer's trade properly, that is, identifying the factors that predict the risk. This justification has the decisive advantage of being apolitical, for it rests not on a value judgment as to what is desirable, but on an observation as to what is risky, an observation that survives the backlash because it does not depend on it⁹.

Distinguishing the material from the moral

One must still rigorously distinguish the materially predictive ESG criteria from those that translate only an ethical preference. Not all the factors filed under the acronym have the same actuarial value, and confusing the two registers runs the risk of pricing on bases that predict nothing, and that expose the insurer to the charge of activism. The discipline therefore consists in retaining the criteria whose link with loss is demonstrated, and in setting aside those that arise from moral judgment alone, not because they would be illegitimate in themselves, but because they have no place in an exercise of risk pricing.

Of these criteria, governance is doubtless the most firmly established, and it is revealing that it is the least politically contested. A company whose internal controls are weak, whose board lacks independence or whose transparency is deficient statistically presents more frauds, disputes and failures, which directors' liability insurers have long known. The letter G of the acronym in fact predates the ESG craze and will outlive it, for it stems from no fashion but from a solid correlation between the quality of governance and loss. This example illuminates the whole reasoning, for it shows that a well-chosen ESG criterion is not a concession to the prevailing mood, but the identification of a risk factor that insurance common sense would have retained in any case, independently of any ethical consideration.

V.ESG as a Source of New Claims

The risk that returns through the policy

A third role of ESG deserves to be isolated, for it is often confused with the previous ones. Beyond a selection factor and a posture, ESG has also become a source of claims that the insurer must cover. Greenwashing actions feed D&O cover, climate litigation, recorded in fifty-five countries, creates a new exposure for liability lines, and environmental harm triggers pollution cover. ESG thus enters the insurer's balance sheet twice, as a sorting criterion and as a peril in its own right, which supposes carefully distinguishing the two functions on pain of confusion. To select an ESG risk and to cover an ESG claim are two different operations, which call for different tools.

This plurality of roles is a major source of confusion in public debate, for it leads to mixing questions of distinct nature. To ask whether the insurer should refuse to cover coal is a matter of selection, to ask whether the premium of a poorly governed company should be raised is also a matter of selection, but to ask whether a liability policy should indemnify a greenwashing conviction is a matter of coverage, and to ask whether the insurer should publish a transition plan is a matter of its own conduct. These four questions are regularly amalgamated under the same ESG label, although they obey opposite logics. Clarifying which role one is speaking of is the precondition of any rigorous reasoning, and the absence of this clarity explains much of the misunderstanding surrounding ESG in insurance, where arguments are opposed that in reality do not bear on the same object.

The specter of a silent ESG

This rise of ESG claims raises a threat the market knows well, that of implicit and unintended cover. Like silent cyber, some old policies could turn out to cover ESG risks without their wording ever having provided for it, whether existing pollution exclusions apply poorly to climate litigation, or no clause anticipated this type of demand¹⁰. The market consequently expects a clarification of wordings, and the development of explicit climate exclusions in certain lines, exactly as the gray area of cyber had forced the move to affirmative clauses. The aim is to keep the insurer from finding itself exposed, after the fact, to a risk it neither wanted nor priced, a mere repetition of a lesson this series has already drawn in relation to cyber.

VI.From Greenwashing to Risk Selection

The insurer is not a moral judge

At the end of this analysis, the arc that runs from greenwashing to risk selection appears as the maturation trajectory of ESG in insurance. As long as ESG remains a posture, a display of values disconnected from loss, it is fragile, exposed to greenwashing litigation, vulnerable to the political backlash, and contestable in its very legitimacy, for the insurer received from no one the mandate to arbitrate what is morally desirable. Once it becomes risk selection, that is, the consideration of materially loss-predictive factors, it regains a far firmer footing, that of the rigorous exercise of the underwriter's trade, without being beyond reach: US attorneys general targeted the alliances for coordinating withdrawals, whatever the motive. The 2025 backlash, far from condemning ESG in underwriting, forced it into this salutary clarification, by separating what arose from conviction from what arises from materiality.

Pricing the transition without judging it

There follows a clear line of conduct for the underwriter, whose role is not to judge the desirability of the energy transition, but to price its risks correctly, whether the physical risk of a disrupted climate or the transition risk weighing on the energies of the past. By confining itself to this function, the insurer in fact serves the transition more effectively than through any declarative commitment, for an accurate price signal, which makes genuinely risky activities more expensive and rewards those that are less so, directs capital with a force that no discourse equals. The true contribution of insurance to sustainability therefore lies not in its promises, but in the accuracy of its pricing, and it is by remaining faithful to its trade, rather than by setting itself up as a moral authority, that the insurer will most surely weigh on the course of things¹¹. ESG, stripped of its share of posture, becomes once more what it should never have ceased to be, a finer way of measuring risk¹².

This clarification has a further virtue, that of reconciling the two shores of the Atlantic that the political quarrel had set against each other. An insurer that founds its approach on materiality alone can make the same case in Frankfurt and in Houston, for it defends not an opinion on the transition, but a measure of risk, which it must be able to show. That measure must also hold over the term of the contract: transition risk plays out over decades, a property policy renews every year, and a coal exclusion founded on materiality alone must say why next year's expected loss is heavier. Otherwise materiality becomes a morality that does not speak its name. The regulatory divergence thus loses its sharpness, not because the regulators agree, but because the insurer ceases to place itself on the terrain where they clash. By taking refuge in the technicality of its trade, it escapes the politicization that threatened it, and regains a universality that values-based ESG had made it lose. The lesson goes beyond insurance and holds for any institution ordered to take sides, namely that professional rigor is often the best protection against ideological instrumentalization.