How can we meet the needs of the present without compromising the ability of future generations to meet their own needs? This is the question people living today need to answer. A question that previous generations have largely ignored, but which no longer waits for us. With all seemingly undisputable truth of climate change issues, overconsumption, demographic change or degradation of the environment, can we still look ahead for a bright, sustainable future? Will our generation make a change in the way we are currently living and really contribute to a more sustainable world? Can we reduce our impact on the world and ensure that the future generations will receive in their hands a world that can still sustain them in the long term?
We should probably each of us question ourselves on this matter, but more important, companies around the world should also consider the question of “how sustainable are we?”. A more specific and measurable way to answer this question is to look at how ESG (Environmental, Social and Governance) principles are integrated within businesses. Reinsurers have highlighted the potential impacts of climate change for longer than many other industries, particularly given its impact on natural catastrophe frequency and impact. Still, the topic of sustainable development became more visible among financial sector and insurers since 2012, when the UN launched the “Principles for Sustainable Insurance”. ESG regulation has largely avoided issues related directly to risk management and focused more on governance and reporting, however, the first principle within the UN principles states that, “We will embed in our decision-making environmental, social and governance issues relevant to our insurance business.”
In the beginning of 2021, ICISA questioned its members on the topic of ESG. We feel that in the recent months, the interest on this topic increased and that insurance companies look with more attention at it. In the past weeks, I’ve talked with several ICISA members from across the Credit Insurance and Surety sectors and tried to gain a better understanding of this topic for myself. Besides the growing, but still foggy, emphasis from regulators on sustainability, the evolution of how ESG is integrated into insurance business shows promise. A study conducted in 2018 by UN Environment’s Principles for Sustainable Insurance found that a vast majority of surety bond underwriters consider 12 out of the 15 ESG risks surveyed when evaluating infrastructure projects. Some of the ESG risks questioned were: pollution, biodiversity loss, greenhouse gas emissions (E), human rights, working conditions, lack of community security / health (S), corruption, unethical practices (G) and more.
All of those I spoke to lately said their companies have particular teams dedicated to looking at ESG in their company. Most of the time, the people overseeing ESG activities are integrated within Corporate Social Responsibility (CSR) functions, or a specific department that focuses on sustainability. For instance, the sustainability department of Zurich has about 80 people, while Liberty Mutual has appointed a Chief Sustainability Officer who reports directly to the CEO.
Environmental risk assessment in underwriting policies
Insurers will likely have focused predominantly on the Environmental element when considering ESG in their business. Perhaps this is also the most due to it being the most easily quantifiable within the ESG acronym. Recent developments in the regulatory agenda have driven this focus, but this has also coincided with more obvious and personal experiences of the effects of climate change, such as record temperatures all around the world, more widespread wildfires on multiple continents, more frequent and severe weather events and many more beyond these. These matters together make this topic unavoidable. Insurers have also recognized for a long time that such events were becoming more frequent and having direct and indirect impacts on a wide range of risks. That insurers will have to face increased claims stemming from such events and the impact on their bottom line has also been a jolt to act.
Insurers then have a clear role to play in the transition to a low carbon economy. This will play out on both sides of the balance sheet with changes in underwriting practices on the one side, and greater emphasis on green assets on the other. As with everything in the battle against climate change, the transition to greener ways of working and operating must occur faster and more efficiently.
Assessment of climate risk in underwriting
There is for sure a challenge in insurance about how the climate risks are assessed, priced and modelled. Looking at the insurance sector more widely, there has been a growing movement to exclude from their underwriting certain types of business that harm the environment. In an analysis within ICISA, members were asked earlier this year if there are any particular risks excluded from their underwriting and about 90% of respondents said that they currently or will in the future exclude certain risks related to coal-fired energy production.
Examples of best practice emerging across the sector are also emerging. For example, Euler Hermes has put in place a pioneering initiative to include environmental sustainability within their risks assessments of different countries. Within the indicators utilized, those aimed at assessing environmental sustainability include: energy use per GDP, renewable electricity output, water stress, recycling rate and climate change vulnerability. In the case of Munich Re an Environmental Risk Department has been set up to look at all the projects that might affect the environment. Similar initiatives are seen across reinsurers, but primary insurers too are taking note of such efforts.
Higher investments for sustainable projects
If we take a look at the asset side, the proportion of insurers’ investments that are green continues to grow. According to Insurance Europe, about EUR150 billion was allocated by European insurers to green investments in 2020. Insurers are learning that as institutional investors, they can exert significant influence to demand greater transparency and sustainability from within their underlying assets. The governmental investment programs would open extra revenues for insurance companies. Programs like Green Deal in Europe and Green New Deal in US are increasing, providing new business opportunities to sureties and credit insurance companies to write new business.
As regulators and policymakers broaden the admissibility of greener assets within capital models, their uptake will continue to grow and the role of insurers in driving change will also grow. These efforts will also be important to ensure that “greenwashing” is not an issue for insurers. It is important that insurers don’t simply rely on their green assets to balance out their brown liabilities. For insurers to influence the debates around economic transition, as well as to help address growing climate-related risks, insurers, including credit insurers and sureties, will need to be more sustainable through both their underwriting and their investment practices.
There is definitely a sense of responsibility within financial sector towards ESG. Insurers are acknowledging that they can do something actively to respond to the threats ESG programmes seek to address. It is also important that such programmes are not simply “special projects” on the side that don’t quite fit into any one business unit, but rather that ESG is quickly integrated into every aspect of how insurers do business. In some quarters, there is doubt on the existence of man-made climate change and/or whether our industry can or should play a role in this field. Having said that, regulators and policymakers have recently weighed in on this topic, saying that sustainability is to become one of the criteria to base capitalization on. The recent speech of the new chairman of EIOPA serves as a striking example. During interviews conducted with ICISA members, I’ve noticed that our members would appreciate the support coming from associations like ourselves to open the dialog. We are proud to take on that role and to support our members in their efforts to make the world a better place. After all, insurance is about putting bad situations right. And there’s not time like now to do that.