The ESG Interview: From Laggards to Leaders

Insure Our Future’s Peter Bosshard says insurers should be in the vanguard of the finance sector’s climate action efforts.

If ever an industry was built on understanding long-term risks, it is insurance. Why then are many insurers still accelerating existential risks to people and planet by underwriting the business risks of firms engaged in fossil fuel extraction? At least part of the reason, according to Peter Bosshard, Global Coordinator for the Insure Our Future campaign, is that the insurance industry has primarily sought to understand risk to profit from it, not prevent it.

“The standard response of insurers to the physical risks of climate change has been to adjust premiums year on year. Risk is inherently good for insurance companies. If risks increase, they can increase premiums,” says Bosshard, also Finance Program Director at the Sunrise Project, a global network of social movements and organisations focused on driving the transition from fossil fuels to clean energy.

In the context of climate change, the insurers’ traditional response is, well, risky. One problem is that the ability of insurers to profit while protecting their clients from rising risks is limited in many jurisdictions because premiums can only be authorised via past damages.

“If you have a curve where damages are expected to increase over the coming years, you know your premium increases will always lag,” says Bosshard. “That’s one thing to be worried about, but at some point risks also become uninsurable. That’s already happening in Florida and it’s only a matter of time until it happens in more geographies, meaning insurers are sawing off the branch on which they sit if they don’t act to support the low-carbon transition.”

The risks are stark to the industry and its customers. According to a 2020 report from insurance broker Aon, natural disasters caused US$3 trillion of economic damage in the decade to 2019, US$1.2 trillion more than 2000-2009, costing insurers US$845 billion.

Rushing for the exits

Until recently, the campaigning efforts of Insure Our Future and its partner organisations focused on encouraging insurance companies to withdraw from underwriting the risks of the coal industry and its customers.

Originally called ‘Unfriend Coal’, the global coalition of NGOs was formed in 2017 in recognition of the systemic importance of insurance to suppliers and users of fossil fuels. “If insurers don’t insure something, it isn’t going to happen. So, they really play a key role in shaping and influencing economic development,” observes Bosshard.

After a slow start, progress has accelerated rapidly. In 2017, less than 4% of reinsurers limited their underwriting activities in the coal sector, but by 2020 the share had risen to 48.3%, according to Insure Our Future’s fourth annual scorecard on the insurance sector’s response to climate change.

Published last December, the report notes insurers are “continuing to retreat from coal”, with 23 of the 30 insurers and reinsurers included in its survey having ended or limited their coal coverage. On the investments side, firms with a collective US$12 trillion AUM have committed to divesting coal or making no new investments in the sector.

The trickle of announcements from major insurance firms on exiting coal has turned into a flood during 2021.

Earlier this month, both Italy’s Generali and SCOR of France, the world’s fourth largest reinsurer, updated their policies to phase-out coal sector underwriting in OECD countries by 2030, and by 2038 and 2040 respectively in the rest of the world. This follows decisions to cut ties with coal by MS&AD, one of Japan’s largest non-life insurers, and three of Korea’s largest non-life providers.

This shrinking capacity is already increasing premiums in the coal sector to uneconomic levels, also making it harder for mining firms to raise capital. But to convey that coal is far from consigned to history, the Insure Our Future Scorecard points out that more than 737 gigawatts of new coal power capacity was in the pipeline or under construction as of July 2020, citing Global Energy Monitor.

Shifting focus

Insure Our Future has deployed a range of tactics, albeit with generally greater success in Europe than in the US and Asia. Direct engagement with insurers is typically the first step, through letters and private discussions. Sometimes, additional pressure is applied by mobilising and harnessing public opinion through information-led campaigns, as well as communications directed at employees and potential recruits. “The insurance industry has a problem attracting talent because climate change ranks very highly in this generation’s concerns,” Bosshard asserts.

These tactics can include eye-catching protests, but Bosshard expects shareholder mobilisation and engagement to take a growing role in the mix in future, especially in markets such as the US and Japan, where existing efforts have been less successful. He cites AIG as an example of a major player that has so far refused to engage.

“Shareholder resolutions are an important tool, but so far one which we have not used a lot in our campaign, because so far firms’ vulnerabilities with the public and their employees have been our strongest leverage points. Where public pressure on climate issues is less, we’ve reached out to investors,” he says.

This broadening of tactics coincides with a shift in strategic focus from coal to oil and gas. Although the battle to minimise coal extraction is far from over, especially in a number of large Asian markets, the wider remit reflects a growing consensus on the major transition challenges.

In its recent Net Zero by 2050 roadmap, the International Energy Agency called for no new coal extraction from 2021, nor new oil and gas fields. With consciousness-raising on coal largely achieved, Bosshard suggests others are now ready to maintain momentum. “I would expect investors to put pressure on the worst laggards, ie the companies that are still insuring coal, typically US and east Asian insurers,” he says.

Fast forward out of fossil fuels

The campaign’s pivot to oil and gas reflects the fact that coal is the main area in which insurers appear to be accounting for climate risks in their underwriting policies. According to a recent ranking exercise by ShareAction, almost half of insurers with a property and casualty business have policies restricting underwriting for the coal industry, while only 19% have similar policies for tar sands, shale oil or Arctic oil exploration. The analysis of the world’s 70 largest insurers gave 46% of firms the lowest ranking for their sustainability practices, with five US insurers in the bottom ten. It also found that while 11 insurers had net-zero investment policies, just two had net-zero underwriting policies.

The report, published in May, found that no insurers had restrictions in place for oil and gas and none had set nature-based targets for its investment portfolios. ShareAction’s report suggests the trouble starts at the top. “For half of the insurers surveyed, we found no evidence of board-level involvement in responsible investment and underwriting, and most boards have not received any relevant training or incentives,” it said.

In June 2020, an Insure Our Future report – ‘Time for the Insurance Industry to Unfriend Oil and Gas’ – set out the urgency of the need to reduce oil and gas production, pointing out that combustion of these fuels accounted for 55% of global CO2 emissions in 2018, absent land use changes. It also noted that the highly concentrated nature of oil and gas insurance (the top six control around half the market) means action by a few major players “can have significant impacts”. Using third party data, the report identifies and ranks the main suppliers of insurance to the oil and gas sector, placing AIG, Travelers, Zurich and the collective underwriters of the Lloyds in the top tier.

Urging insurers to withdraw from oil and gas at a quicker pace than they exited coal, the report also calls for the industry to take a wider and more proactive role. “Insurance companies also need to bring their stewardship activities, membership in trade associations and positions as shareholders and corporate citizens more broadly in line with a 1.5°C pathway,” it notes.

Insure Our Future’s 2020 Scorecard recognises the record of a number of leading firms on climate-related stewardship, through the alignment of their investments with a 1.5C rise in global temperatures (and underwriting policies in the case of Swiss Re and Zurich), as well as the voting records of firms such as Allianz, AXA and Legal & General. They also point out the contrast with US firms, which not only have inferior stewardship records, but many also participate on organisations lobbying against climate action.

A case of cognitive dissonance?

To outsiders, the insurance industry has seemed to suffer a collective case of cognitive dissonance.

Insurance companies have been warning about climate risks for decades, but the overwhelming majority were still insuring new coal, oil and gas projects when Insure Your Future was established. “There was a strong disconnect between what they knew, what they were saying publicly and what they were doing themselves,” says Bosshard.

And although some firms manage their assets as well as their liabilities in-house, this does not necessary lead to a joined-up approach to climate risks by underwriters and portfolio managers within the same organisation.

“Top management will be familiar with the risks on both sides of the of the balance sheet. But these companies have strict firewalls between their asset managers and their underwriters. As investors, they may have a very strong awareness of climate risks, but they’re not talking to the underwriters,” notes Bosshard.

“And in some cases, firms which don’t just invest their own assets have stopped underwriting coal, but still continue to manage assets in coal. They have not applied their coal exit policy to their asset management arm.”

Bosshard points out that insurers are far from alone in knowing one thing and doing another especially when it comes to responding to climate change. They also faced the risk of turning profitable business opportunities over to commercial rivals, thus potentially damaging themselves without helping the climate.

Over time, however, the uncomfortable heat of attention – initially from campaigners, media, think-tanks, academia, then investors and regulators – has driven a reappraisal at many firms. “Initially, there was the inertia of business as usual. But then they got challenged,” he says.

Statement of commitment

Perhaps the most significant recent industry shift is the recent publication of a joint ‘statement of commitment’ by the eight founding members of the Net Zero Insurance Alliance (NZIA), convened by the UNEP Finance Initiative’s Principles for Sustainable Insurance (PSI), a global industry network focused on addressing ESG issues.

The announcement by AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich was timed to coincide with the International Conference on Climate Change held in Venice last Sunday, following on from a Group of 20 finance ministers and central bank governors meeting. which endorsed carbon pricing and reiterated support for multilateral initiatives to direct financial support to climate action.

NZIA’s net-zero commitments are aligned with the those of the recently established Glasgow Financial Alliance for Net Zero (GFANZ) and contributes to the goals of the UN Race to Zero campaign.

Insure Our Future welcomed elements of the statement, such as the signatories’ commitment to “transitioning all operational and attributable” greenhouse gas emissions, including clients’ Scope 1, 2 and 3 emissions, from underwriting portfolios to net zero by 2050. Members are also expected to set science-based emissions reduction targets every five years, and support both disclosure frameworks such as TCFD and TNFD and global policy frameworks “relevant to the net-zero transition and the insurance industry”, such as UN SDGs.

As existing members of Net-Zero Asset Owner Alliance (NZAOA), the firms are already individually setting science-based 2025 decarbonisation targets for their respective investment portfolios.

But the campaign also noted a continued lack of overall coherence, calling on signatories to immediately stop underwriting oil and gas production. “Theres a gap between what they’re committing to and what they’re still doing. Four of the founding members of the alliance are among the top ten oil and gas property and casualty insurers,” says Bosshard.

Although the new decarbonisation commitments set the signatories on a path to more active engagement with and potential exclusion of heavy-emitting clients, Insure Our Future also warned of the risks of the high level of discretion granted alliance members in setting the underwriting criteria required to achieve their net-zero alignment, as well as the 18-month window allowed for the setting of metrics for individual company targets.

Further and faster

Bosshard believes insurers can and should go much further in terms of a more proactive contribution to the mitigation of the effects of climate change.

“Given their privileged access to climate science and their long-term horizons, they should really be in the vanguard of climate action. That starts with underwriting, but it should include their investments, bringing forward resolutions that are pushing the envelope.

“They should be strong public advocates for climate action, actively lobbying organisations such as chambers of commerce, which often take retrograde positions,” he says, suggesting even that insurers could initiate litigation against organisations which have acted on behalf of the oil and gas sector to slow down climate action by governments. “That would send a very strong signal.”

Bosshard also expects regulation to play a significant part in effecting insurance firms’ withdrawal from fossil fuels, not least through greater disclosure, which has already helped to shed light on investment policies. “The next thing that regulators should do is to require insurance companies to disclose the premiums they get from fossil fuel insurance at the aggregate level,” he says. “If a company is insuring a lot of coal or oil and gas projects, it might be holding the bag for future liability suits. As an investor, you should want to know that.”

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