Insurers have seen a rapid increase in the level of focus on their actions to tackle climate change. Activists, customers, investors, policymakers and regulators are all closely monitoring the industry’s progress towards decarbonisation.
However, the road to net zero is likely to face several hurdles, with no clear methodologies in place to monitor emissions arising from an insurer’s underwriting and investment activities and different economies at varying stages of reducing their dependence on carbon.
Against this backdrop, the industry has already taken several steps on its journey towards net zero, believes EY’s global insurance leader Isabelle Santenac, with much more yet to come.
“I think everyone recognises that there is an increasing pressure on insurers from investors, customers, governments and regulators,” she tells The ESG Insurer.
“Many large insurers have made some quite bold commitments, which include in some cases stopping insuring companies where revenues above a certain level are from the coal industry, for example.
“A recent action has been the creation of the Net-Zero Insurance Alliance (NZIA), led by Axa as founding chair and several other large European insurers and reinsurers. We can expect more will join this initiative.
“This is important as it is a good way for the industry to work together to define its targets and common standards. It is a good way of setting the stage, and determining what the role for the insurance industry should be in this process, and what leading practices they should follow.”
Targeting carbon zero
Carbon emissions are broadly grouped in three categories. Scope 1 includes a company’s direct emissions – such as the transport of employees – while Scope 2 includes energy consumed through business activities, such as the air conditioning of properties.
It is the Scope 3 emissions – the financed emissions that are associated with activities in which a company invests or insures – that are the most complex to capture, measure and define.
“For Scope 3 emissions, there is no real methodology yet, with limited good quality data available to measure these emissions,” Santenac explains.
“It is a challenge to accurately measure your indirect emissions. However, that does not mean companies should not take any action until a broader data set is available.
“While this environment is evolving, the NZIA is working on standardising methodology and agreeing on data that can provide comparability. The quality of what is going to be communicated is very important.”
Act now and act fast
While it remains challenging to assess Scope 3 emissions, Santenac does not believe this should stop insurers from taking action.
“Insurers should act now and should act fast. Many have started already. Let’s work on near-term targets now and then evolve plans as clearer methodology and standards emerge,” she says.
The EY insurance chief also believes the industry should be ambitious in reducing rather than just offsetting emissions.
“Demonstrating responsibility is important and echoes very well the purpose of the profession, which is to protect people.
“Setting ambitious targets to reduce your emissions is a great way to stand up for this purpose and show responsibility for what you do.”
She also believes it is important to take a pragmatic approach to doing this, working with clients on their transition plans rather than imposing blanket exclusions.
“While it may not be easy, it’s important to ensure you act with justice and that you achieve net zero in a fair and inclusive way that does not leave anyone behind.
“If you walk away from too many risks it will increase the protection gap – this is a real challenge for the industry.”
While activists continue to pressure insurers to exclude certain forms of cover, Santenac believes those clients will find other ways to cover those risks if their insurer turns their back.
“Ultimately, that will not benefit the planet. Activists are very vocal about not working with these type of clients, but an insurer withdrawing cover will be unlikely to stop those clients from doing business, particularly in countries still dependent on traditional energy sources.
“The coal industry, for example, is still an important source of energy in many countries including some large countries in Europe. You are not going to change that in one day.
“I would rather see the industry help those clients to transition faster – by adapting their business models and products – rather than walking away. That’s my personal view.”
The industry can also play an important role in the transition towards net zero through its investment activities.
“Many insurers are making commitments through their membership of the Net-Zero Asset Owner Alliance. Several insurers are also looking to make impact investments into green infrastructure, companies and bonds, which has a very positive impact,” she says.
“One challenge is where to invest, as there is a lot more demand than there is supply. It is important for governments to encourage the development of public-private partnerships in areas such as building more resilient infrastructure or greener projects.”
Santenac says the price for investing in a green project is already high because there are a lot of people wanting to invest and not a lot of investments.
She also highlights other ways in which insurers are taking steps to influence suppliers and customers to move towards a green economy.
“These may be products that encourage the customer to drive electric vehicles, or to rebuild part of their house with climate-resilient materials,” she says.
“Some have also set up new services to provide advice around climate risk and the transition to net zero, to help them build and accelerate transition plans. There are a lot of actions that are being taken and more to come.”
While insurers and the broader financial services industry can influence, Santenac stresses that the industry cannot act independently of the wider economy in which it operates.
“Insurers can influence and accelerate but cannot do everything by themselves. It is important that the entire ecosystem moves in the same direction – governments, regulators, investors and customers as well as insurers.”
The coming years will be critical as the world moves to address climate change, but Santenac believes the industry has a critical role to play.
“Risk management is in the DNA of insurers – it is their core skill,” she says. “So the industry has an important role to play in educating society about what is to come and some of the bold changes that may need to be made.”