How P&C insurers are using their muscle to reduce carbon

Global P&C insurers are not only setting ambitious carbon reduction targets for themselves, but they are also using their investment clout to restrict cover for high polluters in the oil and gas sectors, a commentary released by DBRS Morningstar Wednesday observes.

“With Environment, Social, and Governance (ESG) awareness on the rise, insurance companies are starting to respond more decisively,” says the commentary, ESG Takes Center Stage as Insurers Set Sustainability Goals and Restrict Cover to High Polluters. ‘They are setting ambitious emissions targets for themselves and restricting cover for some industries like high polluters in the energy and oil and gas sectors, notably the tar sands in Canada and coal.”

The global credit ratings agency notes that several P&C insurers and reinsurers are starting to limit cover to Canadian oil sands projects, including AXA, AXIS Capital, Generali, Munich Re, Swiss Re, The Hartford, and Zurich.

Swiss Re is also limiting cover in certain high-carbon areas in tandem with a 35% carbon reduction target for its investment portfolio to be achieved by 2025. “Swiss Re is…moving ahead with the full phase-out of thermal coal insurance cover,” DBRS Morningstar reports. “It has also introduced a triple-digit real internal carbon levy for its own operations.”

In setting aggressive carbon-reduction targets for their own organizations, global insurers are guided by the United Nations Environment Programme Finance Initiative’s (UNEP FI’s) Principles for Sustainable Insurance, the DBRS Morningstar commentary states.

The six UNEP FI principles include a commitment by insurers to embed ESG principles into their decision-making processes. Insurers also pledge to “work together with our clients and business partners to raise awareness of environmental, social and governance issues, manage risk and develop solutions.” Also, insurers following the principles would work with governments, regulators, and other key stakeholders “to promote widespread action across society on environmental, social and governance issues.”

Recently, Aviva plc announced that it intends to become a net-zero carbon emissions company by 2040, which would be 10 years in advance of a 2050 target date set by the UN Paris Agreement, adopted in December 2015.

“Aviva’s targets are aggressive,” DBRS Morningstar commented, including a cut of 25% in the carbon intensity of its investments by 2025 and of 60% by 2030 (ahead of the 50% cut required by the Paris Agreement).

Zurich Insurance Group has set similar targets, the rating agency adds, “although further out, by planning to fully decarbonize its investment portfolio by 2050 and helping avoid the emission of 5 million metric tons of carbon dioxide.”

Insurers aren’t only setting high standards for themselves, but also for the companies in which they choose to invest.

The Canadian P&C insurance industry invested about $83.4 billion as bonds in 2019, $12 billion in shares, $1.9 billion in mortgages and real estate, and $5.4 billion in term deposits, according to a study by Statistica, a provider of market and consumer data.

Globally, “an increasing number of insurers are signing on to follow the UNEP FI’s Principles for Responsible Investment,” as DBRS Morningstar observes. “With more than $36 trillion in assets, the global insurance industry will play a key role allocating investments to economic sectors that better align with long-term sustainability goals.”

Feature photo courtesy of iStock.com/Gearstd