2021 has seen ESG become a priority topic for many insurers, who have already taken important steps to engage in more ethical and sustainable practices. While environmental, social and governance regulations have advanced over the past decade, the pandemic has accelerated the march towards a more sustainable business world.
There has been a noticeable shift in the expectations of investors, regulators and other stakeholders and now insurers across all industries are focusing more on business continuity, employee health and safety and the environment. Regulatory developments underway in UK, Europe and globally – such as TCFD disclosures, Climate Financial Risk Forum (CFRF) guidelines, Sustainable Finance Disclosure Regulation (SFDR) disclosures and Taxonomy Regulation – have all increased the need for companies to proactively take responsibility for the decisions they make and the actions they take that will affect both the environment and society.
Indeed, two of the main areas of focus of COP26 were to mitigate the impact of climate change and strengthen the resilience of society against such impact. The objective is to reduce emissions and agree on international commitments to guarantee global net zero by 2050.
The insurance sector has been significantly affected by climate and environmental change, and insurers play a major role in identifying and measuring climate risks and in financing the transition to a low carbon economy. Staying competitive while focusing on environmental and social duties means that insurers must continually adapt and innovate.
Industry initiatives
The UN Convened Net-Zero Asset Owner Alliance (NZAOA) is an international group of 61 institutional investors committed to bringing their investment portfolios to net zero by 2050. NZAOA was launched by Allianz and Swiss Re. 2019 and has since added a number of major global insurers as members. Although the NZAOA is led by the insurance industry, it does not cover civil liability and includes other investors as members.
Liabilities are at the heart of the recent Net-Zero Insurance Alliance (NZIA), a dedicated industry net zero initiative launched by AXA and the United Nations Environment Program Finance Initiative (UNEP FI). NZIA brings together fifteen of the world’s leading insurers and reinsurers to play their role in accelerating the transition to net-zero emissions economies. They are committing to take their underwriting portfolios individually to zero net greenhouse gas (GHG) emissions by 2050, in accordance with a maximum temperature rise of 1.5 ° C above pre-industrial levels. ‘by 2100.
As risk managers, insurers and investors, the insurance industry plays a key role in supporting the transition to a resilient, zero-emission economy. The physical and transition risks associated with climate change affect both insurance and investment portfolios of insurers – for companies, financial risks emerge through two main channels, or “risk factorsâ€: physical and transition. The physical risks of climate change arise from a number of factors and are linked to specific weather events (such as heat waves, floods, forest fires and storms) and long-term changes in climate ( such as changes in precipitation, extreme variability in weather conditions, sea level rise, and rising average temperatures). Transition risks may arise from the process of adjustment to a low carbon economy. A range of factors influence this adjustment, including climate-related policy and regulatory changes, the emergence of disruptive technologies or business models, changing societal sentiments and preferences, or changing evidence, frameworks and practices. legal interpretations.
In addition to physical and transition risks, it should be noted that liability risks may arise from individuals or businesses seeking compensation for losses they may have suffered as a result of physical or transition risks. described above, ie ‘if future generations suffer from severe climate change, who will they hold responsible?’.
For insurers, these risks will manifest themselves over time in forms such as increased underwriting, provisioning, credit or market risk, and companies are increasingly aware of the need to adapt or even reinvent their practices to mitigate these risks.
Climate data – adapt and innovate
Identifying and managing risk is at the heart of the insurance industry and a key question for companies is how technology can advance their ESG profile. We see technology being used in a wide variety of new ways, from using satellite imagery and machine learning to understand the management of natural resources that ultimately drives sustainable business practices, to providing a credit insurance in the renewable energy sector.
New sources of environmental data with better capacities to forecast losses will continue to be a critical element in helping the financial services industry and the broader financial services community transform their operations. Insurers have historically used data on an annual basis for some risks, but for climate change, in order to avoid losses, the data should be as close to real time as possible. The growing use of satellite imagery as a catastrophic event to capture every detail of that event enables insurers to process claims in the days following a catastrophic event. Combining satellite, aerial and other imagery with AI processing allows companies to assess damage done almost instantly.
Increasingly advanced technology is providing insurers with access to granular information on properties, topography, weather and environmental conditions that will ultimately enable businesses to better quantify risk, pricing policies and settle claims.
For climate risk, historical data becomes less effective in predicting future risk given the rapid acceleration of climate change over the past decade. New sources of real-time data, such as wind speed, temperature, precipitation, etc., analyzed via artificial intelligence will continue to increase the efficiency and accuracy of forecasting expected losses at the to come up.
The “green recovery”
ESG means that companies must do more than simply integrate ethical and social principles into their business plan; it’s more than just a business strategy. Ultimately, ESG should underpin a company’s vision and help define where the business is going. The availability of new platforms offering alternative and specialized forms of insurance serves to indicate how fast the market is changing and how the “traditional†insurance model is changing.
We have seen companies commit and sign the commitment of commercial ambition to limit the increase in global temperature to less than 1.5 degrees centigrade and reduce the carbon intensity of bond investments, as well as reduce emissions from their own operations. Some companies are making huge commitments to completely eradicate their carbon footprint over the next 20 years and aim to reduce emissions from their investments by up to 60% over the next 10 years. Companies are actively removing coal-based assets from their portfolios and taking further steps to increase investment in renewable and social infrastructure.
Companies must continue to assess the financial risks of climate change and be able to manage and monitor these risks as part of their overall business strategy and risk appetite. They should have clear roles and responsibilities for the board and its relevant sub-committees in managing these risks.
The clear message for insurers is that they will have to adapt to the ESG framework and continue to innovate to remain competitive.
