The insurance industry seeks to address challenges such as climate change and human rights via the Principles for Sustainable Insurance
Insurance companies are uniquely positioned to address environmental, social, and governance (ESG) challenges such as climate change and human rights issues in their roles as risk managers, risk carriers, and investors. There are many reasons why environmental and human rights risks are relevant for the insurance industry; similarly, the importance of climate change-related liability risks has also become devastatingly clear to industry leaders. The insurance industry as a whole has taken note and begun to make strides in identifying and addressing these challenges.
Much of this work is being steered by the Principles for Sustainable Insurance (PSI) initiative, launched by the UN Environment Programme Finance Initiative (UNEP FI) in 2012. The Principles serve as a global framework for the insurance industry to address ESG risks and opportunities. The PSI are now backed by more than 80 insurance and stakeholder organizations worldwide, including insurers representing approximately 20% of world premiums, and $14 trillion (USD) in assets under management.
According to Butch Bacani, who leads the PSI at the UN, “the number and the momentum of insurance industry initiatives that promote sustainable development have been growing over the years. They span multiple issues, from increasing access to insurance and building disaster resilience, to mitigating and adapting to climate change. This year offers a strategic opportunity for convergence. New global and national policies on sustainable development, together with private-sector commitments and multi-stakeholder partnerships, can help harness the full potential of the insurance industry in promoting economic, social and environmental sustainability.”
Last March, the PSI launched the United for Disaster Resilience statement, a commitment to help implement the new UN global framework for disaster risk reduction. It emphasizes that the insurance industry is “well placed to understand the economic and social impact of disasters (…) especially in the context of climate change adaptation, and the need for climate change mitigation.” The PSI has raised its ambitions still further, and is now calling on insurers to make voluntary commitments that build disaster resilience and promote sustainable development.
At the Climate Finance Day in Paris on May 22, 2015, the CEO of global insurance and asset management company AXA Group (AXA), Henri de Castries, announced just such major voluntary commitments. In its role as an investor, AXA committed to divest “from companies most exposed to coal-related activities,” and to triple green investments by 2020. AXA also committed to offering insurance solutions for renewable energy, climate risks, and low-income communities, as well as extreme weather early warning systems and prevention services and advice to governments. In addition, AXA will participate in disaster risk reduction and adaptation projects, and in insurance pooling mechanisms that build disaster resilience.
“There is one thing which is absolutely clear: If [global] warming goes beyond 2 degrees, it’s going to become tougher and tougher, and probably impossible“ for society and the insurance industry to cope with climate change, de Castries said in an interview on Bloomberg Television. “Insurers are the mirror of what happens in the economy and in society. Therefore, climate change is something which is already embedded in the risks we see.” He added that AXA paid out 1 billion Euros (US$1.1 billion) in weather-related insurance claims in 2014, highlighting that of the costs that society actually has to bear from these events, only a fraction are insured.
It is often forgotten that large parts of the global economy, and of the industry sectors that contribute significantly to climate change in the form of carbon emissions, are highly insured. This insurance covers many of the assets that process fossil fuels, from cars to coal-fired power plants. In other words, the insurance industry is not only linked to much of the future damage that may result from climate change, but is also connected to many of the sources of greenhouse gas emissions.
Therefore, it is in the insurance industry’s own interests to better understand how its core business is interrelated with climate change. Insurance companies need to find ways to align both their insurance and investment activities with their long-term interests. Divestment is not the only possible action: working towards certain minimum standards in risk assessment is another sensible strategy.
That is why the PSI, together with the World Bank Group and one of the world’s leading reinsurers, Munich Re, recently launched an international study to develop ESG guiding principles for surety bond underwriting for infrastructure projects. “Although this project does not exclusively focus on climate change risk — it takes a much wider look at environmental, social and governance risks instead — it is an important step towards the integration of ESG risks into underwriting. This is important because of the exposure of infrastructure projects to a range of ESG risks,” says Dr. Astrid Zwick, Head of Corporate Responsibility at Munich Re. “Having voluntary ESG guiding principles in the insurance sector will complement the ESG criteria and guidance we already have for certain industries that are particularly sensitive with regard to these types of risks.”
In the company’s 2014/2015 Corporate Responsibility Report, Stephan Lämmle, Chief Underwriting Officer Engineering at Munich Re, explains why business units appreciate such ESG criteria: The complex infrastructure projects that Munich Re provides insurance coverage for “are usually worth billions” and “almost always come under public scrutiny.” As Munich Re helps to see that such projects are realized, he believes it is important that “by taking ESG criteria into account, we can help ensure that this is done properly.” His experience shows that “if ESG criteria are not met, this generally also reflects the overall quality of risk management for a project.” Therefore, when projects do not meet relevant ESG criteria, “it is in Munich Re’s own interest to distance itself from such activities.”