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Jake Harrison Woods
Jake is a Consultant at Oxbow Partners.Contact Jake
April 23, 2021 Jake Harrison Woods
Flavour of the Month is a new content series for our UK Market Intelligence subscription. We highlight notable monthly market trends, keeping you up to date on the industry’s “flavour of the Month”. This month we focus on Environmental, Social & Corporate Governance. Subscribe to UK Market Intelligence to receive the flavour of the month every month.
As we mentioned in our 3 takeaways from the 2020 results ESG has emerged as a hot topic in the last year with many insurers placing it only second to COVID in terms of priorities. For a simple three-letter acronym coined in 2005, ESG’s meteoric rise over the last decade has seen it go from a fledgling set of ethical principles to a subject most companies feel they need to address and embed in their corporate strategies. In its simplest form, ESG is a method of driving and judging the sustainability of a company and its investments. Environmental and Social aspects generally concern more outward-facing practices while Governance encompasses the practices found within the running of a firm from codes of ethics to employee treatment. Even a cursory look at insurance company reports from this year reveals a steady increase in the attention devoted to demonstrating ESG credentials. Moreover, according to BlackRock, 78% believe COVID-19 has accelerated their focus on ESG with many commentators calling for a ‘Green Recovery’ out of the pandemic. Cynics may argue that much of this is simply PR motivated virtue signalling but many insurers have now set firm targets to cut carbon emissions and become signatories to the various UN backed initiatives in responsible investing.
With global institutions – such as the UN – ramping up their efforts on sustainability, insurers are beginning to sit up and take notice of the clamour for ESG principles to be adopted.
The United Nations has founded or sponsored a number of ESG initiatives relevant to the insurance industry with the number of firms adopting these rising significantly in recent years:
In addition to the UN, the Bank of England and Prudential Regulation Authority (PRA) have taken their own steps towards promoting ESG in insurance.
Lloyd’s of London has also hopped aboard the ESG train, publishing its first ESG report in December 2020. This includes a plethora of commitments for the marketplace including but not limited to:
While many of the initiatives highlighted here have been around for a number of years, they have only seen significant uptake within the last few. The reasons for this are many and varied but the rise in public demand for action is a key factor among these. With the advent of pressure groups such as Extinction Rebellion in 2018, the pressure on governments and institutions has been steadily rising to take regulatory action. The seeds of this are already beginning to bear fruit within the insurance sphere and you can bet the 2020s will continue to see further regulation introduced which enhances the importance of ESG.
During the recent round of 2020 company results, many insurers have made new and renewed commitments to more ethical and sustainable practices, especially net-zero targets. These are just a few prominent examples of the ambitious targets set this year:
Aviva appears to be leading the way among UK insurers with its 2020 results including a new commitment to get its carbon footprint to net zero by 2040. This is full a decade earlier than most banks and earlier than the UN’s own targets. In the run up to 2040, Aviva has also set interim goals of cutting emissions from its investments by 25% by 2025 and 60% by 2030.
Zurich has renewed its commitment to the Paris Agreement having been the first insurer to sign up to the Business Ambition pledge back in 2019 to limit global temperature increases to under 1.5°C. As of March 2021, Zurich now plans to cut carbon intensity in equity and bond investments by 25% before 2025 and reduce emissions from operations by 50% by 2025 and 70% by 2029.
Swiss Re seems to have gone one better than Zurich pledging to reduce carbon intensity by 35% for corporate bonds and equity portfolio by 2025. Its real estate portfolio is reportedly already on track to meet the 1.5°C reduction pathway by 2025 and the company plans to remove all coal-based assets from its portfolio by 2030. On top of this Swiss Re plans to increase investment in renewable and social infrastructure by $750 million as part of its target to increase ESG bond exposure to $4 billion by the end of 2024 ($2.6 billion in 2020). Swiss Re has also committed to achieving net-zero emissions for its own operations by 2030.
International insurance broker Willis Towers Watson has this month pledged to be net zero by 2050. The plan includes a target reduction of at least a 50% by 2030 and a commitment to use 100% renewable energy supplies within Willis Towers Watson’s own real estate portfolio. WTW is also a member of the Insurance Development Forum and ClimateWise as well as supporting the Taskforce on Climate-Related Financial Disclosures.
Over the rest of 2021 we would expect to see a further onslaught of ESG style commitments from insurers, especially during half year results. With Aviva seemingly leading the pack in terms of UK insurers, other big brand names are likely to follow suit as they try to leverage the image boosting potential of ESG. However, eagle eyed readers will have noticed that the vast majority of emphasis has placed on the Environmental aspect of ESG to the detriment of Social and Governance. The reality is these often-forgotten aspects are equally critical for insurers to implement if they wish to demonstrate that their commitment goes beyond just sticking a few solar panels on office buildings. ESG represents sustainability in all aspects and firms will need to ensure their social conscience and governance are sufficiently attractive to the new generation of ethically conscious workers entering the market.
Even if some of the hype around ESG is an exaggeration, the steps now being taken by major insurers will have a very real-world impacts that go beyond just good optics. Reducing the impact of climate change and the consequent impact of natural catastrophes is the interest of insurers. With the number of organisations now vocally striking a position on ESG, the pressure to show some form of public action is mounting. However, ESG should not be seen as just an inconvenient corporate necessity but an area of opportunity for the insurance industry, as well as a potential risk for those who are too cautious in their approach. We have outlined these opportunities and risks in a blog post here.
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As the 2021 United Nations Climate Change Conference (“COP 26”) comes to