How financial services are adopting sustainable criteria

As environmental, social and governance (ESG) concerns become increasingly important in the corporate world, insurance companies are emerging as potentially key players in the shift away from fossil fuel-powered projects. The launch of the UN-convened Net-Zero Insurance Alliance (NZIA) in July 2021 reflects an ongoing change in the global insurance industry towards the wider recognition of the risks associated with climate change.

Targeting Net Zero 

The NZIA brings together eight of the world’s biggest insurers and reinsurers, each of which are committed to transitioning their underwriting portfolios to net-zero greenhouse gas emissions by 2050. NZIA’s members – AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich – were already members of the Net-Zero Asset Owner Alliance. Also convened by the UN, this group of 53 institutional investors has been working towards science-based 2025 decarbonisation targets since early 2019. According to its manifesto, pension funds and insurance companies “have a key role to play in catalysing decarbonisation of the global economy and investing in climate-resilience”. As of early 2022 Achmea, American Hellenic Hull, a.s.r. Nederland, Beazley, Grupo Catalana Occidente, Hannover Re, Icea Lion Group, Intesa Sanpaolo Vita, Llyod’s, Matmut, Munich RE, NN Group, QBE Insurance Group, Shinhan Life and Tokio Marine Holdings had also joined the sustainability alliance.

The NZIA’s statement of commitment includes the implementation of science-based intermediate targets at five-year intervals to measure progress, to be publicly disclosed on an annual basis. In order to meed these targets, members of the NZIA will set independent underwriting criteria and standards, especially in greenhouse gas-intensive industries; engage with clients on their decarbonisation strategies; and develop and offer products for low- and zero-emission technologies. Moreover, they will improve claims management in an environmentally sustainable manner; integrate independent, company-specific decarbonisation risk criteria into their risk management framework; and advocate for governmental policies that facilitate a science-based and equitable transition to net zero.

Exit from Coal

One area in which insurers are playing a particularly instrumental role is in curtailing coal use. In February 2021 French multinational bank Société Générale published a report which noted that coal projects are not economically viable without insurance. It noted that, for this reason, “the insurance industry can, almost single-handedly, exert pressure on coal energy producers, which other industries are less well placed to do”. Moreover, the report found that shunning coal could add billions of dollars to firms’ shareholder value.

A February 2020 report from ratings agency Moody’s came to a similar conclusion. The report noted that a retreat from coal protected against climate change liability and reduced the risk of investment assets being not economically viable due to the presence of carbon-neutral alternatives. “For insurers, carbon-intensive customers that cannot adapt to a low carbon economy are a source of insurance risk as well as a liability risk,” Moody’s wrote. “For example, coal mining or power generation companies facing secular decline in demand for their product might be incentivised to reduce maintenance expenditure.” Indeed, a 2021 report from Munich Re found that climate change-related natural disasters cost the industry $82bn in 2020.

Gulf Transition

While yet to commit itself to a net-zero target, Qatar pledged in October 2021 to achieve a 25% reduction in carbon emissions by 2030, as well as to reduce the carbon intensity of its liquefied natural gas (LNG) facilities by 25% by that same year. The country is pushing ahead with plans to significantly scale up LNG production and export capacity through the North Field expansion project (see Energy & Utilities chapter). The government sees LNG – which is less polluting than crude oil – as a vital fuel in the global energy transition.

Also in the Gulf, the UAE, Saudi Arabia and Bahrain have all made commitments to meet net-zero carbon emissions, either by 2050 (UAE) or 2060 (Saudi Arabia and Bahrain). Although they have made significant efforts to reduce net carbon emissions, Saudi Arabia and the UAE both see a continued role for oil and gas in their respective net-zero futures. In releasing its net-zero plan, Saudi officials said that too rapid a shift away from fossil fuels would leave many emerging markets without reliable sources of energy, and that the transition to net-zero carbon emissions “will be delivered in a manner that preserves the Kingdom’s leading role in enhancing the security and stability of global energy markets”.

The path to net zero is a particularly complex matter for the Gulf, where many countries still rely on the hydrocarbons industry. Although all countries in the GCC have launched long-term programmes aimed at economic diversification, hydrocarbons nevertheless still make up significant portions of economic activity and are crucial to the overall economy. Plans to continue developing hydrocarbons projects have attracted concern from some environmental activists, who fear that the continuation of hydrocarbons production and reliance on carbon-capture technology may not be as effective in reducing carbon emissions as many suggest. Others were more optimistic, highlighting the significance of some of the world’s biggest producers committing to balancing their emissions.

Other Markets

Many insurers in markets around the world have already taken significant steps to divest themselves of coal. By late 2020 at least 65 global insurers with total assets of $12trn had committed to either divesting or making no new coal investments; this figure was $4trn in 2017. European and Australian firms have been frontrunners in this regard. For example, in 2019 Australian insurance giant Suncorp announced it would no longer invest in, finance or insure new thermal coal mines or power plants, and that the firm would not underwrite any existing thermal coal projects after 2025.

Asian insurers have been slower to take action on coal, but there are signs this is changing. For instance, in June 2021 South Korea’s three major non-life insurers announced they would no longer provide coverage for new coal power projects. More recently, in December of that year Hong Kong-based AIA Group became the first major Asian insurer to divest from coal. Meanwhile, insurers in the US are lagging behind: few have taken any meaningful action, and as of mid-2021 US insurance companies still have a combined $90bn invested in coal. There has been progress, albeit slow: in October 2021 AXIS Capital became the first North American insurer to pledge to phase out coal, announcing it would restrict insurance and investment in coal, tar sands oil, and Arctic oil and gas, to facilitate the transition towards a low-carbon economy.

Many in the industry anticipate that it will now move away from oil and gas. Suncorp was the first major global insurer to have said it will no longer directly finance or insure new oil and gas projects, an announcement the company made in August 2021. As of early 2022 French Insurer CNP Assurances had made a similar pledge, and in March of that year Swiss Re said it would phase out support for any oil and gas companies without credible net-zero plans by 2030. It is clear that momentum is growing, and the rapid shrinkage of the coal market is a sign of insurers’ ability to drive decarbonisation.

Decarbonisation 

The industry’s shift away from hydrocarbons will serve to accelerate numerous countries’ energy transitions. Many emerging economies are already increasing their investment in clean power. In July 2021 two environmental think tanks – the UK’s Carbon Tracker and India’s Council on Energy, Environment and Water – published a report forecasting that 88% of growth in electricity demand between 2019 and 2040 will come from emerging markets. Given that renewable energy is cheaper than fossil fuel-based energy in 90% of the world, the report argues that many countries will leapfrog directly to renewables, without building up energy infrastructure based on fossil fuels.

Many emerging markets have already made such a transition. For example, Egypt and Argentina have leapfrogged from gas to solar and wind, without passing through nuclear or hydropower, which would have constituted a more traditional, linear development. However, there is a lack of sufficient capital for emerging markets to develop their capacity. Some $2.6trn was invested in renewables between 2010 and 2019, but among emerging markets, only China, India, Brazil, Mexico and South Africa were able to secure investments of more than $20bn.