Developing ESG underwriting criteria and principles for surety bonds
A surety bond is a unique risk management product that is a form of a performance guarantee, such as guaranteeing the completion of an infrastructure project (e.g. ports, bridges, dams, grids, railways and tunnels). Since infrastructure projects entail substantial completion risks, engineering, procurement, and construction (EPC) contractors are often required to provide completion guarantees. A surety bond is one tool to increase the likelihood of construction completion in case of non-performance. Infrastructure projects could have associated environmental, social and governance (ESG) risks such as environmental pollution, natural resource degradation, forced resettlement, poor working conditions, and corruption. Such projects could also be exposed to climate and natural disaster risks.
At present, there are no internationally-recognised criteria and principles that specifically guide surety bond underwriters in assessing ESG risks associated with infrastructure projects. In this context, the PSI Initiative, together with Munich Re and the International Finance Corporation, and other insurers as well as academics will be developing ESG criteria and principles for surety bond underwriting.
The project has two phases:
- Assessing current practices of the insurance industry in integrating ESG issues into surety bond underwriting through a global survey (starting in the first half of 2015)
- Developing ESG underwriting criteria and principles for surety bonds, and promoting them (2016)
This is an example of how the PSI, as a global framework and initiative, can facilitate the creation of ESG criteria and principles for a specific line of insurance business, in line with the PSI aspiration of reducing risk, developing innovative solutions, improving business performance, and contributing to environmental, social and economic sustainability. The project could set the foundation for developing ESG criteria and principles for other lines of insurance business.