Climate change investment goals take centre stage
New reports show mixed bag for re/insurers on making climate goals part of their investment strategy.
Andrew Putwainposted on Thursday, October 27, 2022
Implementing climate change mitigation strategies for investments has become key for global insurance companies – particularly those in Europe – recent reports show.
Still, significant challenges remain if the industry plans to wean itself off fossil fuel profits.
Advocacy group Insure Our Future released its annual scorecard, which ranked the top 30 global fossil fuel insurers on the quality of their fossil fuel exclusion policies. Their 2022 edition showed that German-based Allianz, French-based AXA, and Axis Capital (Bermuda/US) ranked best for their coal exit policies, while Aviva (UK), Hannover Re and Munich Re (both German) come out on top for their oil and gas exclusions.
AXA, meanwhile, also released its annual Future Risks Report 2022, which listed climate change as the single largest concern for the market. “For the first time, climate risk tops the list of experts' concerns in all regions of the world and becomes the main concern of the general public in the US,” said the company's statement. “Last year, US experts ranked cyber risk first and Asian experts ranked pandemic risk second.”
"Those consulted point out that more extreme climatic conditions are likely to lead to an increase of forced migration, exacerbating geopolitical tensions.”
The survey measures and ranks changing perceptions of emerging risks and is based on responses from a panel of 4,500 experts from 58 countries and a representative sample of 20,000 people from 15 countries.
AXA’s report said that climate change’s effects are beyond dispute. “July 2022 saw record heatwaves in Europe, with temperatures reaching 45.7°C in Spain, hundreds of heat-related deaths in Portugal and nearly 346,000 hectares of ravaged land by forest fires. Those consulted point out that more extreme climatic conditions are likely to lead to an increase of forced migration, exacerbating geopolitical tensions.”
The UK also experienced its first recorded temperature of over 40°C this summer, which further exacerbated call for more action in the country.
In the study, experts were asked to assess each risk’s rate of emergence as “already present”, "emerging quickly” or “emerges slowly”. The proportion that said climate change is “already present” increased from 46% to 54% this year.
The report added that experts were pessimistic about authorities’ preparation, with only 14% considered well prepared compared to last year’s 19%.
“The measures that public authorities should adopt infrastructure investments mitigation and protection strategies were at the top of the answers, just ahead the public-private collaboration that many believe will be crucial to mobilise the necessary investments,” said the report. “It is increasingly clear that actions coordinates are essential to avoid a disaster.”
Effects of ignoring climate change
The report stressed that the effects of these choices could affect insurers and the wider world.
It also highlighted that these challenges affect social cohesion, which, in turn, could have negative financial aspects. “In the general population, the feeling of vulnerability remains at a very high level [with] 80% of respondents considering themselves more vulnerable than five years ago,” said AXA.
“At the bottom of fossil fuel rankings are a group of insurers that have yet to adopt any restrictions on providing cover to coal, oil, or gas projects.”
The report added that public confidence in decision-makers to find adequate solutions is decreasing: this number in regard to public authorities went from 62% (in 2021) to 58%, with private companies it went from 47% to 45%, and with scientists from 75% to 66%. “The public believes authorities preparation for certain risks is insufficient," it added.
Insure our Future’s research supported this climate focus, which now tops the US public’s worries. However, this is still an issue not yet picked up by some of the nation’s biggest insurers.
“At the bottom of fossil fuel rankings are a group of insurers that have yet to adopt any restrictions on providing cover to coal, oil, or gas projects, including US insurers Berkshire Hathaway and Starr and Bermudian carrier Everest Re,” said Insure our Future. “The UK’s Lloyd’s of London also scores very poorly, having announced a coal exit framework in 2020 but then backtracked by declaring it optional.”
“The market share of insurers with coal exclusions has reached 62% in the reinsurance and 39% in the primary insurance markets.”
The report named other insurers that were making gains but had room for improvement: Liberty Mutual, Chubb, and Tokio Marine. “Chinese insurers PICC and Sinosure have not adopted any fossil fuel restrictions but, following Chinese government policy, will no longer cover new coal power plants overseas,” said Insure our Future.
Coal, meanwhile, has become increasingly uninsurable outside of China, Insure our Future’s report said. “The number of coal exit policies has grown from 35 to 41 this past year, with major US insurers AIG and Travelers finally joining the fray. The market share of insurers with coal exclusions has reached 62% in the reinsurance and 39% in the primary insurance markets.”
Insurers without coal exclusions are not active in the fossil fuel sector and the remaining coal insurers lack the expertise or capacity to underwrite large new coal power plants outside China, the report concludes.
AXA’s report recommends investment strategies aimed at mitigating and adapting to climate change, especially for coastal erosion and forest fires, such as the net zero transition.
While many companies are now changing strategies, the Insure our Future report also revealed that there is a lot of work still to do. Investment and underwriting strategies remain out of sync with one another.
The report also showed that many companies are still making significant profits – both in investments and underwriting - from fossil fuels, and it could be several years yet before they plan to divest completely.