Sustainable insurance must include climate actions

Many will be familiar with the United Nations-supported Principles for Responsible Investment (PRI), which are based on the notion that environmental, social and governance (ESG) issues, such as climate change and human rights, can affect the performance of investment portfolios and should therefore be considered alongside more traditional financial factors. Since the launch of the PRI in 2006, they have become essential for institutional investors and today there are over 3750 signatories that together manage over $120 trillion in assets.

The Principles for Sustainable Insurance (PSI) are not as familiar as the PRI, although there are many similarities between the initiatives. The development of PSI was overseen and managed by the United Nations Environment Programme Finance Initiative (UNEP FI) and launched in the 2012 UN Conference on Sustainable Development ("Rio+20 Conference").

While both PSI and PRI are global, voluntary and aspirational frameworks supported by the UN and focusing on the risks and opportunities associated with ESG issues, PSI is a framework specifically designed for the insurance industry. In other words, PSI not only deals with investment management, but also proposes ESG actions for underwriting, risk management, and claims management.

According to PSI, sustainable insurance is "a strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are done in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with ESG issues".

The Principles for Sustainable Insurance (PSI) are as follows:

1. We will embed in our decision-making ESG issues relevant to our insurance business.
2. We will work together with our clients and business partners to raise awareness of ESG issues, manage risk and develop solutions.
3. We will work together with governments, regulators and other key stakeholders to promote widespread action across society on ESG issues.
4. We will demonstrate accountability and transparency in regularly disclosing publicly our progress in implementing the Principles.

PSI and climate actions

Although the four high-level principles may seem abstract at first glance, just referring to ESG in general, it's important to remember that the letter "E" stands for environmental. In order to understand how PSI relates to environmental actions specifically, it's beneficial to drill down into each principle separately.

Within Principle 1, insurers should start by establishing a dialogue with shareholders on the relevance of environmental issues and then define a company strategy at the board and executive management levels to identify, assess, manage and monitor environmental issues in business operations. They could also incorporate climate matters into recruitment, training and employee engagement programmes.

In underwriting and risk management, insurers should implement processes to identify and assess carbon footprints inherent in the portfolio, and be aware of potential consequences. It's also possible to integrate climate issues into risk management, underwriting and capital adequacy decision‑making, including research, models, analytics, tools and metrics.

When it comes to product development, insurers could bring forward products and services that reduce risk and have a positive impact on climate change. In claims management, insurers should integrate carbon footprint measurements and reductions into repairs, replacements and other claims services.

Within Principle 2, insurers should establish a dialogue with clients and suppliers on the benefits of managing environmental issues and the company’s expectations and requirements on ESG issues in general. They should also integrate greenhouse gas (GHG) emissions reporting and other relevant ESG matters into tender and selection processes for suppliers. They could even encourage clients and suppliers to disclose GHG emissions and to use relevant disclosure or reporting frameworks.

Within Principle 3, possible actions include supporting appropriate policy, regulatory and legal frameworks that enable risk reduction, innovation and better management of environmental issues. Insurers could also open up dialogues with various other stakeholders, such as governments, regulators, industry associations, academia and media, in order to facilitate change and promote public awareness of environmental issues and good risk management.

Finally, within Principle 4, insurers should assess, measure and monitor their own progress in managing climate related issues and regularly disclose information publicly – particularly their indirect GHG emissions ("Scope 3"), which typically accounts for the lion's share of total emissions. One way to achieve this is to participate in relevant disclosure or reporting frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) or the Carbon Disclosure Project (CDP).

Conclusion

Today, more than 180 companies in the insurance industry have adopted the four Principles for Sustainable Insurance. Together they represent more than 25% of the world's insurance premiums and over $14 trillion in assets under management.

The purpose of the PSI Initiative is to help the insurance industry to better understand, prevent and reduce ESG risks, and to take advantage of the opportunities involved. By adhering to the principles, insurers publicly demonstrate their adoption of sustainable insurance goals and agree to a certain level of transparency in managing ESG issues.

ESG – and sustainability in general – is a broad topic covering much more than just climate related questions. We would argue, however, that of all the possible sustainability ambitions, combating climate change must be among the most important ones. Our vision is that the global insurance industry will reach net zero emissions in 2040.

Therefore, while we think it's important and commendable that insurers adopt the Principles for Sustainable Insurance, we also recommend that insurers seek out and implement additional frameworks that have a more climate specific agenda. One example of such an initiative is The Science Based Targets initiative (SBTi).