The use of the initialism ESG has changed during my career in insurance. When I was doing my actuarial exams, there was a debate over the best model to use for interest rates within ‘Economic Scenario Generators’. Now ‘Environmental, Social and Governance’ criteria are more likely be on the agenda for insurers.
ESG criteria are a set of standards from a societally conscious perspective that are being used more and more by companies in considering how they do business and who they do business with.
Environmental considerations look at the impact of a company’s activities on nature and the planet. Social considerations are concerned with relationships with employees, suppliers and customers. Governance looks at how a company is managed, led, rewarded and controlled.
The ‘E’ in ESG for insurers
In this blog, I consider the environmental considerations for insurers, currently a very hot topic (pun intended!).
Climate change has been at the forefront of the minds of those insurers exposed to natural catastrophes in recent years, as the frequency and severity of windstorms, wildfires and floods has increased. How much of the increase is due specifically to climate change and how much is just natural volatility is unclear, but the consensus of opinion is that there is a trend of larger and more frequent weather events.
Insurers have also been looking beyond the impact of losses due to changes in the climate to thinking about the environmental impact of their underwriting strategy and this is higher on their agenda than ever before.
The release of the report from the UN's Intergovernmental Panel on Climate Change (IPCC) in early August makes sobering reading. The report is the first major review of the science of climate change since 2013 and is timed in the run-up to COP26, the key climate summit to be held in Glasgow in November.
In the report, the UN Secretary General said "If we combine forces now, we can avert climate catastrophe. But, as today's report makes clear, there is no time for delay and no room for excuses. I count on government leaders and all stakeholders to ensure COP26 is a success." He went on to say the report is a "code red for humanity", “the alarm bells are deafening" and “this report must sound a death knell for coal and fossil fuels, before they destroy our planet."
So how are insurers reacting to this increased focus on environmental concerns?
I was recently a guest on LCP’s first ever Insurance Uncut podcast where we discussed this issue, you can find a link to the podcast here.
Environmental activist groups such as Extinction Rebellion have been putting pressure on insurers for a number of years and there are an increasing number of recent examples which illustrate insurers’ commitment to addressing environmental issues including:
- A number of insurers have declined to provide ‘brown’ cover for specific risks eg the Project Carmichael coal mine in Australia
- Plans for a captive insurer at Lloyd’s for pipelines have been shelved
- The Net-zero Insurance Alliance (NZIA) has seen eight of the world’s largest insurers come together to commit to being net-zero by 2030
- Lloyd’s have announced plans to phase out coal, oil sands and Arctic exploration cover by 2030.
In fact, since the IPCC report was published, Lloyd’s has announced that it is considering accelerating its plans to phase out insurance cover for coal and oil sands underwriting.
Investment
It’s not only on the underwriting side where insurers can help to address environmental concerns. Insurers typically hold large funds from which claims are paid. Worldwide insurance assets are estimated to be of the order of $30trn. There is scope for insurers to invest more in environmentally friendly infrastructure projects such as renewable energy and it is common for investment advisers to have a responsible investment team.
Conclusion
Insurers have made efforts to take on board environmental concerns but are they moving quickly enough? It will be interesting to see how insurers react to the IPCC report as it appears the measures outlined to date may be too little and too late.
In addition, COP26 may result in further governmental pressure on insurers to accelerate their plans to address climate change. Concerted worldwide action is required and my concern is that some governments may not sign up to what is needed, or implement what is agreed. I encourage everyone to follow the proposed actions coming out of COP26 with interest!