Liz Booth examines new initiatives from the insurance sector as it looks to take the lead on sustainability
The relevance of insurance in enabling global economies is never in doubt – well at least among insurers. And the same goes for many of the systemic risks facing the world.
However, in the past couple of years it seems that investment houses and the banks, led by former Bank of England governor Mark Carney, have taken over the financial services conversation around climate change.
As we head towards the UN Climate Change Conference (COP26) in Glasgow later this year, many in the insurance profession believe it is time to change the narrative and ensure the insurance voice is properly heard.
A recent report from McKinsey sums it up: “We think it is a question of broadening the relevance of the industry beyond just pricing and transferring risk, but actually changing outcomes.”
Dickon Pinner, senior partner and global leader of McKinsey’s sustainability practice, explains: “We have spent a lot of time now looking at both the physical risk and transition risk posed by climate change. The physical one in particular is, I think, underappreciated in how near term it is, how nonlinear some of the impacts are. Also, as we know, the impacts will be systemic and potentially highly regressive.”
However, he also acknowledges: “I have seen a big switch between the real economy and the capital markets. I would say five years ago, the energy sector and automotive sector were ahead in terms of thinking about this. That has changed markedly in the past 12 to 24 months. If you pull back the cover on capital markets and you look across banking, asset management, and insurance, the lead dog has been the banking sector.
“I think that has been driven initially by regulation coming out of Europe, particularly the Bank of England, which has made the case that climate change represents an existential threat to the financial system,” he added.
Mr Pinner, however, remains confident, saying: “Insurance within that plays a critical role in terms of transferring and mitigating risk.”
Butch Bacani, who leads the Principles for Sustainable Insurance at the UN Environment Programme, adds: “Modern-day insurance’s roots can be traced to the UK insurance industry. The UK is hosting COP26, so ‘insurance is coming home’. This means that the global insurance industry – through its risk management, insurance and investment activities – has a historic opportunity to lead by example in speeding up and scaling up the transition to a just and resilient net-zero emissions economy.”
So, how will the voices be heard? Mr Bucani believes: “For the insurance voice to be heard at COP26, it has to be credible and be backed by urgent and ambitious climate action by the industry. The PSI is contributing to this effort through some of the most ambitious collaborative initiatives by the insurance profession. “These include establishing a pioneering Net-Zero insurance Alliance (NZIA), the largest gathering of insurers to pilot the recommendations of the Financial Stability Board’s Task Force of Climate-related Financial Disclosures (TCFD), and working together with the Vulnerable Twenty Group of Finance Ministers (V20) to create a Sustainable Insurance Facility that would provide financial protection for micro, small and medium-sized enterprises in the most climate-vulnerable countries.”
The insurance and reinsurance coverage we provide to our customers can support the transition to a greener economy
The seven companies – AXA (NZIA chair), Allianz, Aviva, Munich Re, SCOR, Swiss Re and Zurich Insurance Group – believe the global insurance and reinsurance profession can play a key role in accelerating the transition to a resilient, net-zero emissions economy, in line with the 1.5°C target of the Paris Agreement on climate change.
By establishing the NZIA, these insurers are building on their climate leadership as investors through the
UN-convened Net-Zero Asset Owner Alliance.
Renaud Guidée, chair of the NZIA and group chief risk officer of AXA, stresses: “We insurers and reinsurers can deliver impact on climate not only through our investment decisions but also through our underwriting actions. The insurance and reinsurance coverage we provide to our customers can support the transition to a greener economy. We believe it is our role to both serve our clients and preserve our planet.”
The work of the NZIA is already influencing insurance entities across the world. Lesley Ndlovu, CEO of Africa Risk Capacity, which recently produced its first report, thejournal.cii.co.uk/features/2021/06/02/africa-insurance-action, says: “ARC was set up to move the dial on natural disasters from a reactive to a proactive approach. The objectives of the NZIA are at the core of our mandate and we are working through the PSI to encourage the adoption of ESG principles across Africa.”
Dr Bronwyn Claire, senior programme manager at ClimateWise, is working on a report led by the University of Cambridge Institute for Sustainability Leadership, Insurance Systems for the Climate Decade, which will address how insurance systems and their regulators can contribute to the urgent, global and just transition to resilient, net-zero economies.
“We will explore this question with insurance transformative thinking at the heart of the financial system, with the aim of providing actionable recommendations for COP26 and beyond,” she says.
Dr Claire explains: “While many initiatives exist for the alignment of investment holdings with science-based targets for the transition to a low-carbon economy, there is limited support for insurers, who need to align an equally significant book of underwriting liabilities with a net-zero ambition. An insurance client can have many parts to their business, with differing carbon intensity and differing pathways to net zero.
“Also, it may not be appropriate to consider all types of insurance in the same way, so we need to break this down by line of business as well as sector for insurance. In the coming months, our project will test practices, tools and knowledge to build capacity and enable the insurance industry to make and act on a responsible commitment to net zero.”
Liz Booth is contributing editor of The Journal