27 October: What’s going in ESG and Insurance?
October 27, 2022 Miqdaad Versi
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The highlight this month: ESG and Investment
Read our summary and analysis below.
Analysis
ESG and investment
ESG impacts all parts of insurers and reinsurers, from underwriting and operations to investment. On the investment side there is growing sophistication:
- More (re)insurers are publicly disclosing more ambitious targets in their investment portfolio on net-zero, exclusions and impact investment
- Ratings of what is “sustainable” are developing: from the Article 8 / Article 9 attribution (EU Taxonomy), to those of rating agencies or other ESG rating tools, and despite their many challenges, they will continue to develop
- Practically, many (re)insurers have developed dashboards showing emissions and the ESG scores of their investment portfolio with the goal of understanding their portfolio’s alignment to net-zero and its implied temperature rise.
This week we have seen the next steps for the Net Zero Asset Owners Alliance, which has launched a public consultation on the third version of the Target Setting Protocol (TSP). Notably, the third edition of the TSP will introduce an emission reporting framework for sovereign debt accounting; overarching principles for target setting in private assets; and carbon accounting for direct commercial real estate mortgage loans.
Sustainable forms of investing (or “ESG investing”) is predicted to grow at pace for insurers as well as ILS funds. The leaders will continue to develop their ESG investment approach, not only in line with their strategies but also with awareness of these market trends and the ramifications for their portfolios.
Summary
Importance of ESG
Climate change becomes the number one risk around the world: AXA (Reinsurance News)
AXA’s 2022 Future Risks Report found that climate change is becoming the number one concern around the world. Geopolitical risks come in second place, overtaking cyber and pandemic risk. The report is based on responses from a panel of 4,500 risk experts from 58 countries and a representative sample of 20,000 people from 15 countries.
Read the full article
London Stock Exchange launches voluntary carbon market (ESG Today)
The London Stock Exchange has announced the launch of its voluntary carbon market (VCM). According to the exchange, this is the first public markets capital raising solution for the voluntary carbon market aimed at directing finance to climate mitigation projects that provide carbon credits. Demand for carbon offset projects, and related credits, is expected to increase significantly over the next several years as companies commit to a net-zero future.
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Exclusions
Insurers increasingly withdraw from fossil fuel projects: Climate activists’ report (Insurance Journal)
In their latest annual scorecard of ESG restrictions, Insure Our Future found that 62% of reinsurance companies have plans to stop insuring new coal projects and 38% exclude oil and natural gas projects. Of 30 (re)insurers, Allianz, AXA and Axis Capital ranked best for their coal exit policies, while Aviva, Hannover Re and Munich Re had the most extensive oil and natural gas policies. Notably, most of exclusion policies had been introduced in the last year. By contrast, Berkshire Hathaway, Starr and Everest Re have announced few or no restrictions to coal, oil or gas projects. Insure Our Future also criticised Lloyd’s of London for announcing plans to end coal coverage two years ago but then declaring it optional.
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Coal projects outside China becoming “uninsurable”, says climate group (The Guardian – subscription required)
New coal power projects are becoming “effectively uninsurable” outside China due to so many insurance companies excluding coal from their underwriting and investment portfolios. AIG and Travelers have recently announced they will stop underwriting coal, meaning 41 insurers now have coal insurance exit policies. Notably, 18 insurers have ruled out support for the East African Crude Oil Pipeline (EACOP), which has been struggling to find coverage. However, all of those who have not ruled our support have syndicates at Lloyds of London, where those running the EACOP have been reported to be looking for insurance cover.
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Investment and green finance
China raises the bar on investor regulations to promote green finance (Principles for Responsible Investment)
The China Banking and Insurance Regulatory Commission (CBIRC) have introduced a set of new guidelines which require banking and (re)insurance companies to establish strategies to support the transition to a sustainable future. This includes explicit requirements to “reduce the carbon intensity of their asset portfolios in a gradual and orderly manner, and eventually achieve carbon neutrality of asset portfolios”. Under these guidelines, China’s financial regulator is specifying green finance and ESG related requirements for banks & (re)insurance companies for the first time.
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Net-Zero Asset Owner Alliance launches public consultation on third edition of Target Setting Protocol (UNEP FI)
The UN-convened Net-Zero Asset Owner Alliance has launched a public consultation on the third version of the Target Setting Protocol (TSP). The TSP outlines the methodologies the 75 members use to develop intermediate climate targets. The third edition of the TSP will introduce an emission reporting framework for sovereign debt accounting; overarching principles for target setting in private assets; and carbon accounting for direct commercial real estate mortgage loans. The consultation period runs until the end of October.
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ESG-focused institutional investment set to rapidly expand (Artemis)
Investor interest in institutional asset classes that are ESG appropriate is set to increase rapidly. It is predicted that ESG assets under management around the world will expand 84% by 2026. At present, demand is outstripping supply and investors cannot find enough ESG assets to invest capital into. The majority of asset managers surveyed are aiming to convert their existing fund products to be more ESG aligned rather than developing new. ESG is likely to remain a core focus in the ILS space going forward.
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Challenges when engaging in ESG: Ukraine, greenwashing & activists
Ukraine: A conflict that changed the world – the (re)insurance industry response (Lloyd’s)
The conflict in Ukraine continues to drive economic, geopolitical, and humanitarian uncertainty around the globe. Lloyd’s of London has published a second report highlighting the vital role the (re)insurance industry has to play in building long-term societal and economic resilience in response to the impacts of the conflict. Specifically, the report highlights opportunities for action across seven market forces shaping the risk landscape: cyber, supply chain, food security, climate transition, energy security, and ESG & public sentiment. Accordingly, the insurance industry possesses a “formidable toolkit” across four areas to tackle these challenges:
- Capital: Bringing capital to bear
- Solutions: Addressing emerging need
- Risk advisory: Becoming a true risk partner
- Collaboration: Key to unlocking action and driving change
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Ukraine “significant bump in road” for energy transition and “headache” for insurers (Insurance Insider)
The war in Ukraine and its impact on global energy supply has created a “significant bump in the road” in terms of energy transition plans, causing a “headache” for the insurance industry. According to Aon’s UK head of natural resources Monty Lynch, governments have developed a focus on energy security in the wake of the conflict. This has changed the priorities of many from energy transition, given momentum following COP 26, to energy security. Lynch added that the period up to the 2050 net-zero ambition will be “interesting” as other “bumps in the road” are likely to occur, whilst global GDP growth would inevitably lead to increased energy demand.
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HSBC’s “misleading” climate ads banned (ESG Clarity)
The Advertising Standards Authority (ASA) have banned a series of sustainability-focused adverts by HSBC. In the first ruling of its kind, the ASA said it had received 45 complaints over HSBC advertisements that promoted the bank’s tree planting venture and transition to net-zero. In contradiction, the bank also funded £14bn worth of fossil fuels and deforestation in 2021. Campaigners and ESG investment professionals said the move sets a precedent for other banks to be more transparent and is a significant step-change in holding banks accountable for greenwashing.
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Activists from Extinction Rebellion protest at Baden-Baden (Reinsurance News)
Around twenty people from the activist groups Extinction Rebellion and Debt4Climate have occupied the Kongresshaus in Baden-Baden, where the annual Reinsurance Meeting is being held. A number of activists climbing onto the canopy with a banner saying, “Stop (re)insuring Climate Chaos”. Others glued themselves in front of the entrance doors.
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