Insurers have been warned that investing in untested technology to prove their commitment to environmental, social and governance (ESG) criteria may damage their portfolios’ credit quality.

“Strong ESG consideration doesn’t necessarily translate into a higher credit quality,” ratings agency AM Best says in a review of ESG in the insurance sector.

Responsible Investment Association Australasia CEO Simon O’Connor recently told Insurance News magazine that many insurers and reinsurers are integrating ESG principles into investments to reduce their exposure to emerging risks such as climate change.

There is no industry-wide ESG standard, nor guidance on how to integrate ESG risks into the underwriting process, prompting a variety of approaches.

AM Best says a number of insurers are implementing exclusion criteria to knock out risks such as coal extraction and energy use, controversial weapons and tar sands.

ESG risks are also being considered in underwriting processes, through approaches such as risk selection and geocoding.

The financial impact of ESG will make quantifying and integrating climate change risks into investment practices and underwriting grow in importance, AM Best says.