The latest IPCC climate report made it clear that if we want to halt and level off global warming at around 1.5°C, we need to stop adding CO2 to the atmosphere by 2055. That in turn would require that we move away from fossil fuels starting immediately.
It is our firm belief that without a strong contribution from the financial services sector, it will not be possible to reach targets set by the Paris Agreement. Financial institutions are in a unique position to take meaningful climate actions, not only by ceasing to fund or insure polluting businesses, but also by reducing indirect emissions in their supply chains.
Focus shifting from insurance risk to climate action
Until recently insurance companies have primarily focused on the impact of rising global temperatures on insurance risk. Structural shifts linked to e.g. rising sea level is one thing that clearly impacts insurance risk, while increased volatility in weather phenomena is another.
Now, however, as the discussion around global warming is really heating up, insurers are also starting to focus on the flip side, i.e. how they can advance efforts to actually address climate change.
A recent article by the Boston Consulting Group (BCG) cites a survey of 3,000 people in eight countries, which found that 70% of respondents are more aware now than before COVID-19 that human activity threatens the climate. The same study also showed that 87% of respondents think that companies should integrate environmental concerns into their products, services, and operations to a greater extent than they have in the past.
Benefits for insurers with a compelling climate strategy
BCG points out a number of concrete benefits that insurers, who develop a compelling climate strategy and apply it across all domains of their business, stand to reap. These include:
- Improvements to the underwriting business, by development of new types of insurance products and by targeting new customers.
- Better investment performance, by factoring climate and other ESG matters into investment decisions.
- Becoming more attractive in the eyes of institutional investors and thus winning more third-party investment mandates.
- Positive brand impact and improved ability to attract and retain talent.
Key areas for climate impact
We have previously written about opportunities, where the insurance industry can make a climate impact. Therefore, we were happy to discover that BCG had also identified several impact opportunities for insurers, and that they largely overlapped with the opportunities we’ve described.
In their insurance specific analysis, BCG divides climate opportunities into four key areas: 1) Underwriting portfolio, 2) Investment portfolio, 3) Internal emissions, and 4) Regulatory and reporting.
Within the underwriting portfolio, insurers can drive change in the customer base by using exclusion to remove clients with high greenhouse gas (GHG) emissions. Alternatively, they could engage with clients during the underwriting process and adjust premiums and terms & conditions based on climate related matters.
Insurers can also expand and adjust the suite of offerings. For example, insurers could create new insurance products that support climate change progress and promote climate-friendly action. For more on this topic, please see our article about Net zero car insurance.
When it comes to the carbon footprint of assets under management, insurance companies are in the same boat with most other institutional investors who wish to make a change. It’s worthwhile emphasizing that due to the nature of the insurance business, insurance companies are among the largest asset managers in the world.
BCG describes a number of key principles that can be included in the investment policies of institutional investors:
- Exclusion – not investing in certain companies or industries that have a negative climate impact.
- Engagement – supporting high GHG emitters in their efforts to reduce emissions and become more sustainable enterprises.
- Target setting – setting clear carbon emission targets for portfolios, as described e.g. in the Net-Zero Asset Owners Alliance.
- ESG integration – integrating ESG performance of individual companies into investment analysis and decision making.
- Investments in specific sectors, such as renewable energy.
When it comes to GHG emissions from internal operations (i.e. scope 1 and 2 emissions), insurance companies are similar to other service firms. Compared to indirect emissions from the supply chain (i.e. scope 3 emissions), direct emissions from internal operations are relatively small.
In other words, if insurers want to make an impact by reducing emissions stemming from their operations, they need to focus on the supply chain associated with the claims handling process. It’s vital that insurers identify and calculate GHG emissions associated with their claims handling processes, because due to the sheer size of the industry, they can make a big impact through data-driven and enlightened purchasing decisions.
Regulatory and reporting
The fourth and final area BCG takes up is regulation and reporting, driven by the fact that investors and regulators are continuously requesting more and more transparency and robustness in reporting.
BCG points out that while reporting standards are converging, there remains a proliferation of coalitions and task forces at global, regional, and national levels. Therefore, there is an opportunity for insurers to take a more active role in shaping the regulatory and reporting standards for the industry.
We fully agree with BCG’s assessment that insurers have a great opportunity to become leaders in the climate fight due to their expertise in assessing and taking risk. We were also happy to see that they had identified several impact opportunities for insurers, which largely overlapped with the opportunities we’ve described previously.
To seize the opportunity, insurers must address a number of key questions and formulate a compelling climate strategy that cuts through and crystallizes – for all stakeholders – what the company aims to do.
Besides taking a deep look at all the key areas described above, insurers should also define the appropriate level of climate ambition. What are the needs of our stakeholders? In which areas do we want to take a leading position? What kind of leadership is needed in order to make the required changes?