Green issues forced onto insurance agenda

The World Economic Forum’s (WEF) Global Risks Report placed the issue of sustainability at the top of the world’s economic priorities with the warning that global business had to act quickly. It also put the world’s insurers at the heart of the efforts to deliver a sustainable future

WEF President Borge Brende has made it clear the need to move towards sustainability has arrived.

“The political landscape is polarised; sea levels are rising and climate fires are burning. This is the year when world leaders must work with all sectors of society to repair and reinvigorate our systems of cooperation, not just for short-term benefit but for tackling our deep-rooted risks,” he said.

For 15 years Zurich Insurance has been a sponsor of the Global Risks Report and the group’s head of sustainability risk, John Scott, told Insurance Times the insurance sector is in a unique position as both a major investor, but also the industry to which business looked to share and manage their risks.

“Sustainability is more than climate change,” he explained. “It can be viewed as ESG, environmental, societal and governance.”

The environmental concerns look at areas such as climate change, particulates, and plastic in the world’s oceans. Societal impact concerns areas such as social protection, child and slave labour, while governance looks at the way which firms understand the risks they face and how they ensure proper systems for governance are in place.

“For insurers we have to understand the areas of sustainability that matter to our stakeholders, which includes our staff, shareholders and clients,” added Scott.

However it is not a one size fits all issue for insurers. The concerns of the life, large commercial, domestic retail insurers and reinsurers will more than likely differ significantly.

Climate change

On the threat from climate change, the physical impact of climate change in terms of the severity and frequency of weather events is an obvious concern for underwriters.

“It presents both challenges and opportunities for the industry,” said Scott. “There is always the option for insurers to choose what they want to underwrite in terms of risks, but there is also the challenges we all face with the transition from a high to low carbon economy.

“There are for instance the technological challenges that will come with that transition in areas such as transportation, the provision of sustainable energy and infrastructure.

“These are areas where the insurance industry can help by supporting companies as they undertake that transition.”

The issue for the global economy is also how governments will look to influence the issue with the creation of carbon taxes or tariff for goods dependent on their carbon footprint.

As some of the world’s largest investors the insurance sector has been looking at how it can divest its investment strategy from carbon heavy industries and companies. But is not simply a case of bowing to stakeholder demand.

Stranded assets

The spectre of stranded assets is also driving the insurers’ thoughts. As long term investors insurers are cognisant of the fact that the risks faced by investing in carbon heavy companies or industries only to find the capital heavily depreciates or is lost as the move to a sustainable future gathers momentum.

The other issue for insurers is that a move to withdraw investment or underwriting capacity from carbon-heavy industries can come with a societal cost.

“Coal is a good example,” explained Scott. “In Europe, the Czech Republic and Poland remain coal-heavy economies. As such if we as an industry simply withdraw insurance and risk management capacity, we then potentially create societal problems of unemployment not only in the coal facilities but also those businesses and sectors that rely in their operation, which could find themselves out if work.”

Scott added there is also a secondary impact. “If we withdraw our involvement and engagement with these companies then we also remove any influence we have with them. What we need to do is to work with these companies to look to how we can aid their transition to a low carbon future.”

As an industry there are three areas where insurers can exert their influence. As investor, in terms of how and where they choose to invest. As underwriters in terms of the risks and companies they choose to work with, and finally as risk managers and the ability to engage with clients to manage risks.

For large international companies or those that have a dominant domestic position there is the ability to work with, and influence, government policy as to their move to a sustainable economy.

Scott said Zurich, like a number of insurers, now refuse to underwrite new thermal coal risks or those firms which derive more than 30% of their revenue from the use, or mining of thermal coal.

“We are also one of the first big investors in green bonds with a $5bn target for the overall impact investment portfolio,” he added. “These impact investments are aimed to avoid 5 million tonnes of CO2-equivalent emissions while improving the lives of 5 million people each year.”

The situation is not black and white but Scott believes insurers have a real role to play.

“We are society’s risk managers,” he said. “The key is continuing our efforts to work with companies to encourage and drive transition to greater sustainability.

“While we can play a role we cannot achieve success alone. We need Governments and business to recognise the need to challenge both the physical and societal risks we face and the need to deliver that transition to a sustainable economy.”