The shadow nonprofit’s push for ESG

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Nonprofit interest groups play a significant role in advancing policy change in government. The IRS affords tax exemption to thousands of these groups via their 501(c)3 status. These organizations operate separately from government entities. In exchange for receiving tax exempt donations, nonprofits adhere to stringent limitations on their lobbying activities.

While this is straightforward, most people are likely unaware of certain nonprofits that shadow or emulate government agencies. One such organization is known as the National Association of Insurance Commissioners (NAIC).

Since 1871, NAIC's stated purpose has been to professionally support the roughly 11,000 state insurance regulators in maintaining stable insurance markets. Yet, in recent years, NAIC has moved beyond its mission to stealthily foist environmental, social, governance (ESG) requirements onto state insurance entities.

ESG policy typically requires regulated entities to adopt policies to mitigate climate change, accommodate social justice causes, and advance race- and gender-based diversity goals in corporate governance. ESG policies thus often amount to a system of burdens and restraints on free enterprise, in order to appease an array of left-leaning political interests.

The NAIC has recently received attention for operating as both a tax-exempt nonprofit association and a quasi-governmental regulatory organization. In this way, NAIC does not pay taxes nor report an annual 990 form detailing the source of its funding and financial activities.

This shadow nonprofit can also circumvent government transparency requirements established through prominent laws like the Administrative Procedure Act and Freedom of Information Act (FOIA). NAIC can ignore FOIA requests for information about its operations, while imposing standards that skirt notice and comment requirements in rulemaking.

NAIC's regulatory impact is vast. Its recently adopted "residual interests" rule has the potential to "hit American insurers even harder than Solvency II," according to my colleague John Berlau. As John explains, Solvency II is a devastating European Union policy that has "resulted in higher insurance premiums for European consumers and businesses and a shortage of long-term insurance policies." NAIC's residual interest rule threatens to amplify these disastrous effects for American consumers.

This transnational import of harmful EU policy was foreshadowed in an article by Dr. John Fonte exposing leftwing NGOs like Human Rights Watch and Amnesty International USA for following a similar playbook. Specifically, Fonte warned that:

"In promoting this 'leadership role' the governing left [in America] has blurred the boundaries between our constitutional democratic order and post-constitutional supernational governance, while at the same time obfuscating the distinction in foreign policy between traditional American leadership with an inter-national system versus an American 'leadership' that translates into acquiescence to a transnational system with its concomitant surrender of democratic sovereignty."

This controversial framework has allowed NAIC to advance policies that transform the entire insurance industry without proper transparency or accountability. As Edward Snowden once warned, "there can be no faith in government if our highest offices are excused from scrutiny - they should be setting the example of transparency."

If NAIC is the standard-setter for supporting sound insurance regulation and consumer protection, then why does it operate in shadows, rather than in full view of the constituents it serves?

NAIC abuses its governmental status by obfuscating its regulatory activities outside of the insurance regulators it engages with. NAIC also undermines its nonprofit status by hiding its financial activities, board governance, source of funding, and expenses.

NAIC takes advantage of its shadow status by advancing stealth ESG policies onto the state insurance firms it supervises. The most notable of these is its 2024 Statement on Environmental, Social, and Governance Policies impacting the entire domestic insurance industry. The chief insurance officials in all 50 state and territory members adopted NAIC's ESG statement.

While NAIC's ESG statement stops short of mandating that insurance companies integrate ESG into their business practices, it essentially directs insurance regulators to coordinate on ESG policies. NAIC deputizes insurance regulators into ESG experts, authorizing them to promote a progressive-left policy agenda with state legislators and executive officials under the guise of promoting sound financial standards.

NAIC makes the critical mistake that many federal agencies made under the Biden administration: assuming expertise over ESG at the expense of its regulatory purpose. It is not for NAIC to issue an industry-wide ESG policy to nudge insurance officials into action on purely political issues.

Private insurance companies are more appropriately situated to hire their own ESG experts and issue voluntary statements to their customers if they deem it to be a priority for their business.

NAIC's top-down approach steps over such private autonomy. Additionally, NAIC's ESG statement signals that they are formulating ESG-specific policies in the space of "climate risk, race and insurance, corporate governance, and other related factors to the extent they directly pertain to our responsibility to protect policyholders and supervise the financial health of insurers."

In essence, NAIC's statement serves as a warning to regulated entities that insurance commissioners are taking ESG factors seriously and may act on them soon (despite a clear lack of authority). It also warns that NAIC-imposed ESG regulations are coming down the pipeline and can be advanced through the chief insurance regulators that uniformly acknowledge ESG.

This approach to strongarming state regulators to influence ESG policy exceeds NAIC's authority. Encouraging state regulators to act on ESG matters also circumvents the 50 state governors' authority in this space. State insurance commissioners are appointed by their governor and work under their lead, not an unelected body like NAIC.

As Gregory Lawson of the Buckeye Institute warned in his recent report, "…although states retain significant regulatory authority in these areas, close relationships between [the International Association of Insurance Supervisors], NAIC, and state regulators, may affect state-level policy without raising the same public scrutiny that federal actions receive." NAIC's ESG statement stands in defiance of how each state legislature and executive approaches ESG, imposing directives to state commissioners by an unelected quasi-governmental entity.

NAIC has also coordinated with financial regulators like the Federal Insurance Office (FIO) to implement ESG regulation. We see this with FIO's proposed Climate-Related Financial Risk Data Collection rule. Despite initially opposing the rule, NAIC reversed its stance and agreed to share ZIP code level consumer data with FIO from the largest home owner insurers.

The NAIC has no proper basis to share this sensitive information. Additionally, FIO's rule still relies upon President Biden's defunct whole-of-government climate change initiative that was rescinded under the Trump administration. Given the complete change in climate policy from Biden to Trump and the invasive data mining requirements, the FIO should rescind its rule.

Moving forward, Congress should heed growing calls to hold NAIC accountable to the American people. Sensible policy reform of NAIC can be found in the American Consumer Institute's latest report and in proposals from Americans for Tax Reform.

State insurance regulators are under the authority of state governors and should be democratically accountable. NAIC's shadow policymaking in ESG circumvents this dynamic and frustrates proper state governance. We must end such shadow rulemaking and restore accountability in insurance regulation.