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Keep me informedNovember 10, 2022 Philip Allan
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The highlight this month: COP27, what can we expect and what does it mean for insurers?
Read our summary and analysis below.
COP27 kicked off earlier this week in Sharm El-Sheikh, Egypt. This year’s event is expected to focus more on action and implementation than previous years – with a broad view that there has been enough discussion on ambition, and it is now time to act. Supporting this ambition, there are specific “action” events highlighting contributions to COP27 outcomes through near-term action and implementation; Implementation Labs (iLab) where solutions and roadblocks to overcome will be discussed – with particular emphasis on the need for collaboration to reach 2030 goals; and Future Labs to showcase bold ides in moving towards a regenerative, just world.
As part of the conference, there is a “Sustainable Insurance Series”. With particular focus on emerging markets, e.g. on micro, small, and medium-sized enterprises (MSMEs) and on building a more resilient African economy and insurance market (including the first ever financial commitment from the African insurance industry on climate). There are also several new standards and frameworks being launched – NZIA target-setting protocol, PCAF insurance-associated emissions standard, and the California sustainable insurance roadmap.
There seems to be a consensus view that long term resilience building is key to responding to challenges in the coming years, particularly so in the case of catastrophic events. The (re)insurance industry clearly has a role to play here – both directly by helping communities rebuild after disaster but also in offering skills and experience in the drafting of policy and shaping behaviour. It is up to industry to ensure they are part of the conversation.
There is a continued push to support the move from ex-post to the more efficient ex-ante funding of disasters, and this will include the need for insurance solutions. The key barrier here was the lack of funding to push this forward. The German government have played a vital role in the development of the Global Shield Financing Facility (GS-FF), for this very purpose. The GS-FF will channel capital to protect vulnerable nations against climate and disaster risks, specific details on how this will work will be released following the announcement.
These new standards, frameworks, and finance solutions (or opportunities) are likely to have significant ramifications for the sections of the (re)insurance industry that take them forward. The question will be: what about for everyone else?
Climate change is becoming the number one risk concern around the world, according to AXA’s Future Risk Report 2022 – based on responses of 4500 risk experts and a representative sample of 20,000 people from 15 countries. The feeling of vulnerability among the general public is very high, and increasing, with climate change, energy crisis, and geopolitical tension identified as key drivers. At the same time confidence in decision makers is waning, particularly in public authorities, private companies, and in scientists – explained by a public belief that these bodies are unprepared for certain risks (climate, cyber, and geopolitical tension).
Europe’s insurers and reinsurers wish to reiterate their willingness to continue playing their important role in climate change mitigation and adaptation in support of the goals of the UN Paris Agreement and the European Green Deal. As Europe’s largest institutional investors, with over $10tn in assets under management, insurers have a key role to play in the transition.
Insurers and reinsurers have outlined condition they require to support this transition, including a regulatory landscape that facilitates our industry’s contribution to the green transition and a strong focus, notably by public authorities, on prevention and adaptation. The sector stands ready to engage with all interested parties to identify how these conditions can be met in the most efficient way.
Insurers’ UW and investment strategies will increasingly be influenced by ESG considerations according to a report from Fitch. An increase in weather related losses due to growing physical risk is prompting (re)insurers to increase premiums and in some cases pull back from the market. Returns on assets related to carbon-intensive industries are also expected to decrease. They also noted social risks have seen less of the spotlight in recent years in place of climate, but expect insurers will have to grapple with issues like mis-sell of investment products, and governance risks more in future. Fitch also suggests changes to strategy to account for these challenges may gradually reshape some insurers’ credit profiles, potentially affecting ratings.
Global failures to strengthen mitigation and adaptation efforts to avert and minimise climate-related losses and damages have seen forecasts for the climate finance gap reach $8bn in 2022. Adaption costs in developing countries could reach $300bn by 2030 – international public finance amounts to less than 10% of this. Developed countries are paying far less than their fair share, there are also disagreements over what qualifies as a contribution. The alliance recommended increased investment in adaption efforts focussed on prevention and management of avoidable losses – in particular, for vulnerable communities.
The NZIA has launched a public consultation on the Alliance’s target setting protocol. The Protocol outlines the recommended approach to target setting and reporting as well as anticipated future evolution. It enables members to independently set science based interim decarbonisation targets. The protocol builds on PCAF’s upcoming “insurance-associated emissions” standards. The final version will be launched January 2023 with NZIA members disclosing their initial targets by July 2023.
Around 50 activists protested outside Chubb CEO, Evan Greenberg’s, home in New York over the insurer’s policies on fossil fuel insurance. Activists also encouraged “flooding” work phone lines of senior members of the Chubb teams work lines. The protest was part of Insure Our Futures broader campaign.
20 protesters from Extinction Rebellion and Debt for Climate occupied the Kongresshaus where the Baden-Baden Reinsurance Meeting took place. At the same time, Insure our Future called on assembled reinsurers to stop underwriting coal, oil, and gas production. Berkshire Hathaway and Lloyd’s of London were singled out as two of the last major insurers still underwriting expansion of the coal industry. Another focus was on the insurance broker of the East African Crude Oil Pipeline (EACOP) broker, Marsh – EACOP is expected to generate an additional 34 million tonnes of CO2 per year at peak production.
The FCA is proposing a package of measures including investment product sustainability and how terms like “ESG”, “green”, and “sustainable” can be used. The move intends to protect customers and improve trust in sustainable investment products. The FCA is also proposing customer facing disclosures to help discern key sustainability features of a product, and requirements on accessibility to this information.
The head of climate strategy at Aon, Richard Dudley, has access to capital is key for carbon intensive industries to support their transition away from fossil fuels. Many companies in this sector have plans in place to achieve net zero and need support in reaching these targets. It is important to consider societal resilience as well as climate in these discussions – the insurance industry has a role to play in ensuring a sustainable transition by supporting access to necessities like food and energy. Engagement, not exclusion, is key to meeting targets while making sure needs are met along the way.
The energy transition will prompt a decline in long-term gas prices and damage the economic viability to future liquified natural gas (LNG) projects in Africa. Both existing and emerging producers face material exposure to external climate transition risk. The rise of alternatives will mean gas is uncompetitive before assets’ end of life. There is a worry this will be exacerbated by current spikes in LNG prices driving accelerated implementation to capitalise on short term gains.
During the next two weeks, many of the world’s political leaders will convene in Sharm El-Sheikh in Egypt to discuss the next steps forward in addressing climate change. Talks this year have been dubbed “Action COP”, with agreement there has been enough talk on ambition and now it is time to implement. Macro challenges like the energy system shock and inflation in the last year have shifted the attention of many leaders towards domestic issues. However, all is not lost, resilience has emerged as the term to encapsulate the need for governments to plan long term for catastrophic events.
The role of (re)insurers and intermediaries is clearly intrinsic to building this resilience but it is the job of industry to ensure they are part of the conversation – reminding leaders and governments of the skills and roles it plays in shaping behaviour.
Most metrics to measure ESG performance are from an investor perspective but recently there has been an emphasis shift to the perspective of underwriting. These typically focus on strategies and company guidelines – what risks are insured and what measures are in place to measure carbon impact.
However, there is another measure, the protection gap. It is estimated only around $130bn of the $343bn of loss due to extreme weather is covered by insurance. Clearly more of this loss being insured would be a social good but the issue is cost – expense ratios have fallen but driven more by an increase in revenue than absolute saving. While challenging, there is much insurers can do to reduce expenses, in turn cost, and therefore work to close the protection gap – for example, using technology and embedding in existing distribution channels to reach in-need customers.
The World Bank is set to announce the launch of the Global Shield Financing Facility (GS-FF), a new financing structure to channel capital to protect vulnerable nations against climate and disaster risks. It is seen as a “version 2” of the Global Risk Financing Facility (GRiF) which has already delivered over $2bn in project financing. Items will include things like contingent credit and market-based insurance risk transfer. Detail on how exactly the GS-FF will be released following the announcement. It is expected that other financing solutions will also be announced at the conference.
UNDP and ICIF Foundation are launching a new mechanism to promote innovative mutual insurance schemes to protect the most vulnerable in developing countries. The Fund is starting with $600k to support mutual insurance initiatives focussed on resilience building in vulnerable communities. The fund will support a minimum of 4 organisations over 2-3 years to scale existing microinsurance offerings to reach new customers and markets.
The International Sustainability Standards Board (ISSB) has unanimously confirmed that companies will be required to use climate-related scenario analysis to inform resilience analysis. They also agreed to provide application support to preparers on methodologies to undertake scenario analysis, informed and supported by existing TCFD guidance and materials.
About the author
Philip Allan
Philip is a senior consultant at Oxbow Partners. He has recently worked on an ESG strategy project for a European insurer and a transformation project for a UK insurer. Previous projects include target operating model design for a bank, and a global data privacy uplift for a financial services multinational. Philip Holds a master’s degree in Engineering from the University of Cambridge.
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