4 July: What’s going on in ESG and insurance?
July 4, 2023
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. This week’s topic: Decarbonisation targets in underwriting – the start of more?
Read our summary and analysis below
Analysis
Decarbonisation targets in underwriting – the start of more?
Following the collapse of the Net-Zero Insurance Alliance (NZIA), there has been a risk that decarbonisation targets for insurance would be set aside, with (re)insurers instead focussing their work on net-zero on product innovation within underwriting, alongside specific plans within their investment portfolio and operations. This is despite the widespread acknowledgement that exclusions are not the only way to deliver on net-zero commitments, as was discussed at the Climate Summit in Bermuda last week.
In the past week, however, Axa – despite departing from the NZIA – have chosen to lead the way by announcing new decarbonisation targets for their insurance portfolio. These targets form part of a broader, ambitious but well-laid out plan to supporting the global transition to net-zero. Their standard-setting approach is moving the dial on what it takes to be a market leader in this space.
The question is: which other (re)insurers will publicly state targets and be willing to hold themselves accountable to their stakeholders? Will all the former members of the NZIA hold to their commitments and publish targets in July, or even later in the year? Or will decarbonisation targets only be a preserve of only the biggest (re)insurers in the world? Many of us will be watching intently – as only time will tell!
Summary
Net-zero and climate change
Exclusions shouldn’t be main focus to reach net zero: Bermuda panel (Insurance Insider – subscription required)
During the Bermuda Climate Summit, a panel consisting of sustainability leaders from Axa XL, Conduit Re, Convex, and Vantage Risk emphasised the importance of having comparable emissions data on insureds to achieve a net-zero transition in underwriting portfolios. They agreed that exclusions alone are not the best approach.
The panel discussed challenges in measuring insureds’ emissions and the need for a consistent methodology to assess carbon footprints, especially in light of the disintegration of the Net-Zero Insurance Alliance. They highlighted the role of insurance in the global transition and stressed the significance of understanding firms’ transition plans and their overall stance on climate change. Miqdaad Versi, head of ESG at Oxbow Partners UK, as the panel chair, emphasised the need for accountability and comparability across the industry.
Axa announces new decarbonisation targets for insurance portfolio (Insurance Times)
On the 29 June, Insurance company Axa announced its commitment to reducing carbon emissions for its clients. By 2030, the company plans to reduce carbon emissions of its largest commercial insurance clients by 30% and the carbon intensity of other corporate clients by 20%. Axa also aims to decrease the carbon intensity of its significant personal motor portfolios by 20% and implement environmentally sustainable claims management by 2026. To support the transition to a low-carbon economy, the company intends to expand its insurance activities in renewable energy and other sectors adopting sustainable business models. Axa emphasises the importance of collaboration with customers, stakeholders, and partners to address the risks of climate change and biodiversity loss effectively.
MAPFRE leaps ahead in sustainability: A 26% reduction in global carbon footprint (Fintech Global)
In honour of World Environment Day, MAPFRE has launched an ambitious decarbonisation plan spanning across its operations in 25 countries.
The global insurer remains dedicated to reducing its carbon emissions by increasing the use of renewable energy and supporting sustainable transportation. Notably, the carbon footprint associated with business travel has decreased by a significant 68%, especially in countries like Honduras and Paraguay.
The company has surpassed its own targets for reducing its carbon footprint, with an overall decrease of 26% compared to 2019 levels. This exceeds the initial goal of a 3.5% reduction by 2022.
Biba rolls out partnership to help brokers on Net Zero journey (Insurance Age)
The British Insurance Brokers’ Association has added Flotilla Group as an associate to help support members with their sustainability ambitions. Flotilla is a carbon accounting firm and net-zero delivery partner.
Pullback by insurers opens door for parametric wildfire coverage (Business Insurance)
Parametric coverage for wildfire exposures is gaining traction amid a challenging environment for catastrophe-exposed property risks. With the traditional property insurance market hardening, capacity for wildfire risks declining and retentions rising, parametric coverage can help provide additional capacity.
Several large personal lines insurers, including State Farm Mutual Automobile Insurance Co. and Allstate Insurance Co., recently announced they will stop writing new commercial and personal property insurance in California due to increased wildfire risks, among other things. Improved data sources and satellite imagery are also among the reasons for the broader uptake because better data translates to improved coverage trigger designs and increased confidence among users, experts say.
ARC launches parametric flood product in Africa (Reinsurance News)
The African Risk Capacity (ARC) Group has launched a parametric insurance product aimed to help African countries cope with the devastating effects of flooding. This mechanism will provide countries with predictable and rapid financing for early response to cope with emergency disaster events caused by floods.
The Flood product will generate daily flood analysis and calculate the associated impacts for each country. These impacts are compared to the parametric triggers (economic losses or the number of people affected), and payouts are calculated if flood impacts exceed the trigger threshold defined by the country.
According to the announcement, the launch of this product is a significant milestone in building resilience to climate-related disasters on the continent as it is the first flood risk insurance product in Africa.
International collaboration and standardisation
ISSB issues inaugural global sustainability disclosure standards (IFRS)
The International Sustainability Standards Board (ISSB) has issued its inaugural standards – IFRS S1 and IFRS S2. The Standards will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions.
IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.
Both fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
PCAF and CDP align data quality systems to support standardisation (PCAF)
PCAF and CDP have co-authored a paper examining the importance of data quality as part of a wider initiative to align their data quality scores. The co-authored paper examines the challenge posed by a lack of standardisation in data quality scoring, which has a significant impact on the financial system’s progress to decarbonisation. This lack of standardisation not only results in inaccuracy and inconsistency in emissions reporting between financial institutions but can make cross-comparison and benchmarking more difficult.
In the paper, PCAF and CDP set out how their continued collaboration objective to align their respective data quality systems to simplify and streamline the process of measuring and disclosing emissions for the financial system.
Sustainable Markets Initiative Launches Astra Carta (Sustainable Markets)
The Sustainable Markets Initiative has launched the Astra Carta, a roadmap for the global private sector to align their space-related activities with sustainability goals, approaches, and standards in partnership with governments, international organisations and other stakeholders.
The Astra Carta’s framework – similar to the Sustainable Markets Initiative’s Terra Carta – aims to convene the private sector in creating an ambition and momentum in advancing and accelerating sustainable technology and business models. It also recognises the unique role that space can play in creating sustainable Earth and the need for space-related industries to consider environmental and sustainability impacts both on and beyond our planet. Its ambition encourages a focus on placing sustainability at the core of space activity.
Regulation and legal accountability
Individual directors face risk of climate-related law breach accountability (Insurance Times – subscription required)
Law firm Kennedys have warned that individual directors could be prosecuted if their duties are seen to breach climate-related laws. In a statement, Kennedys highlighted that global litigation cases related to exposures associated with environmental, social and governance (ESG) have more than doubled since 2015 to over 2,000 – a quarter of which occurred between 2020 and 2022.
Of these cases – which have increasingly centred on greenwashing – compensation has often been sought from company directors, with losses falling on directors and officers (D&O) insurers. Therefore, Kennedys concluded that D&Os and their insurers should take a proactive approach in monitoring and dealing with risks amongst their insureds.
New social metrics to be added to EU sustainability reporting regime (Reuters)
European financial regulators now mandate asset managers to report on social aspects of their investments, such as earnings in tax havens or tobacco production, inadequate pay for employees, and trade union interference. This highlights the growing investor interest in the social dimension of ESG (environmental, social, and governance) issues.
In addition, the European Securities and Markets Authority, the European Banking Authority, and the European Insurance and Occupational Authority have proposed six further opt-in metrics, including:
- average share of employees on zero-hours contracts;
- average share of employees on temporary contracts;
- share of zero-hours/temporary employees as a percentage of total workforce;
- average share of disabled employees in the workforce;
- lack of complaints procedure for customers; and
- lack of grievance procedure for communities affected by businesses in the portfolio.
Texas bill looks to stop insurers from utilising ESG criteria (Reinsurance News)
A report in The Texas Tribune has noted that insurers in the state can no longer account for environmental, social or governance criteria, when setting rates for most forms of insurance following the passing of a bill by the Legislature in May.
Senate Bill 833 has no penalties and allows companies to consider factors that are “relevant and related to the risk being insured”, even if those risks include ESG factors.
Investor sentiment and market dynamics
Anti-ESG movement in U.S. feeds anxiety among UK investors (Insurance Journal)
Investors in the UK are concerned about the potential spread of the anti-ESG movement from the US. The backlash against ESG led by the Republican Party has shocked the industry, as threats of lawsuits and blacklists hit some of the world’s biggest banks and asset managers.
While there is currently little hostility toward ESG in the UK, isolated incidents and concerns about defence companies being underfunded due to ESG priorities have raised some scepticism. Therefore, the UK Sustainable Investment and Finance Association is urging the government to provide clear guidelines on whether it is part of an asset manager’s fiduciary duty to consider environmental damage, social unrest, and corporate governance risks.
ESG Capital raising continues apace, still a driver of investor allocations: Preqin (Artemis)
Despite the backlash against ESG investing in certain parts of the United States and elsewhere, capital raising for ESG investments, funds and strategies continues apace, and for investors ESG remains a key driver of allocations.
According to Preqin, there has been a three-fold increase in annual capital raised for ESG investments between 2020 and 2022, rising from $29 billion to $92 billion. Europe remains the most ESG focused investor community it seems, with some three quarters (79%) of aggregate capital raised going to Europe-based ESG funds, followed by 14% in North America and 7% in APAC.
Given the acceleration in ESG fund raising, the average ESG fund size has also increased, from $400 million in 2017 to closer to $600 million in 2022. Preqin states that whether ESG helps to drive returns in the longer-run remains a contentious issue. But what does not seem contentious, is investors appetites for investments with ESG qualities and so what is clear is how ESG can influence deals and investments.
About the author
Eleanor Ewen is a Senior Consultant at Oxbow Partners. Her work has included undertaking a culture review for a Bermudian reinsurer and building a ‘break-out strategy’ opportunity for a UK retail insurer. Alongside this, she helped draft a ground-breaking report on ESG which launched in Bermuda.
