As the world intensifies its efforts to combat climate change, the role of insurance companies has become increasingly crucial. These companies not only manage the financial risks associated with climate events but also influence the broader economic transition to a low-carbon future. In this context, the concept of a "just transition"—ensuring that the shift to a sustainable economy is inclusive and equitable—has gained prominence. This article explores how leading insurers like Swiss Re, Aviva, and AXA are navigating these complex waters, integrating innovative practices, and confronting the challenges inherent in this pivotal transition.
Regulations such as the EU's Sustainable Finance Disclosure Regulation (SFDR), the new EU Corporate Sustainability Reporting Directive (CSRD), HKEX’s New Climate Requirements under the ESG code and China's Mandatory Sustainability Reporting Guidelines or the Green Insurance Business Statistics system mandate insurers to disclose their environmental, social, and governance (ESG) risks, as well as how they incorporate sustainability into their investment and underwriting processes. The inclusion of sustainability disclosures, along with just transition plans, is challenging the strategies of modern insurance companies in response to a warming world.
Understanding The Just Transition
A just transition is critical in ensuring that the move towards a sustainable economy benefits all, particularly vulnerable and marginalised communities. This approach aims to create jobs, protect livelihoods, and reduce inequalities as economies shift away from fossil fuels. For insurance companies, embracing this framework means not only mitigating environmental risks but also addressing the social implications of their underwriting and investment activities.
CASE STUDIES: LEADING INSURERS IN THE CLIMATE TRANSITION
Swiss Re: Integrating ESG and Climate Risks
Swiss Re has been at the forefront of integrating Environmental, Social, and Governance (ESG) factors into its business strategy. The company recognises that managing climate risk requires a comprehensive approach that includes both risk assessment and the development of new insurance products. For example, Swiss Re has pioneered index-based insurance and catastrophe bonds that provide financial protection for climate-related events, thereby helping communities and businesses build resilience.
Swiss Re's commitment to a just transition is evident in its efforts to align its investments and underwriting practices with the goals of the Paris Agreement. The company has set targets to reduce its carbon footprint and is actively involved in initiatives that promote sustainable development. However, challenges remain, particularly in balancing the immediate need for risk mitigation with long-term sustainability goals.
From Swiss Re: The ESG risk process
Since 2023, Swiss Re no longer provides single-risk re/insurance covers for, nor directly invests in new oil and gas field projects. Swiss Re is aligning its strategy with global climate goals by gradually phasing out single-risk re/insurance for oil and gas producers unless they commit to net-zero emissions by 2050, targeting 50% compliance by 2025 and 100% by 2030. Additionally, by 2030, they aim for 60% of gross written premiums from listed companies in their property, general liability, and commercial motor portfolios (excluding fossil fuels) to come from firms with science-based targets validated by third parties, focusing on those headquartered in OECD countries.
Aviva: Aiming for Net Zero
Aviva has set an ambitious target to achieve net-zero carbon emissions by 2040, reflecting a strong commitment to sustainability. This goal involves significant changes in the company's investment and underwriting strategies, including divesting from high-carbon sectors and investing in renewable energy projects. Aviva also focuses on enhancing transparency and accountability in its climate-related disclosures, which is crucial for maintaining stakeholder trust​.
Aviva Baseline measurement aligned with PCAF and NZIA’s insured emissions methodology:
Insured emissions = Carbon emissions of insured asset (or client) * Underwriting Attribution Factor
(Underwriting Attribution Factor = Technical premium / Annualised asset or enterprise value)
In terms of a just transition, Aviva emphasises the importance of engaging with clients and communities. The company offers insurance products that support sustainable practices, such as policies for energy-efficient homes and vehicles. This approach not only helps reduce emissions but also makes insurance more accessible and affordable, supporting broader social goals. Nevertheless, Aviva faces the challenge of ensuring these products are inclusive and accessible to all, especially vulnerable populations. For instance, Aviva Zero, the carbon-conscious car insurance that covers the cost to offset at least 1,000 miles of carbon emissions from driving or charging the insured car for the policy year. The car owner with this policy could also choose to pay to offset 50% of the remaining miles, according to Aviva. The offset projects, as illustrated on its website are Gold Standard or Verified Carbon Standard-backed projects in Africa.
AXA: Restricting Insurance for High-Carbon Industries
AXA has taken a firm stance on limiting its exposure to high-carbon industries, particularly through its decision to cease insuring new thermal coal projects by 2024 and phase out existing policies by 2040. This policy is part of a broader strategy to align AXA's business practices with the Paris Agreement, aiming to reduce its carbon footprint significantly.
AXA's approach to a just transition involves not just environmental considerations but also social equity. The company engages with stakeholders to develop policies and practices that support a fair transition for workers and communities affected by the shift away from fossil fuels. However, balancing these efforts with the need to maintain profitability and competitiveness remains a critical challenge. Gathering appropriate data for the social dimension may pose more challenges than for climate change. The objectivity and suitability of indicators will need to be thoroughly tested, according to AXA. Just transition requires a holistic view of both climate and social progress, as well as other ESG topics highlighted through transition processes.
AXA aims to achieve €6 billion in gross written premiums for its transition insurance between 2024 and 2026. The company's initiatives include incorporating ESG criteria into its insurance business processes and investment strategies to mitigate risks associated with deforestation, ecosystem conversion, and the protection of key biodiversity areas as disclosed in its TCFD x TNFD report. In France, AXA has teamed up with insurance broker Marsh to provide clients with a 25% reduction in deductibles for their environmental risk policies if they integrate specific biodiversity commitments into their corporate strategy.
MEASURING THE BASELINE: INSURED EMISSIONS CALCULATED WITH PCAF
A critical aspect of climate transition planning for insurers is the accurate measurement of insured emissions. The Partnership for Carbon Accounting Financials (PCAF) provides a standardised approach that helps insurers quantify the greenhouse gas (GHG) emissions associated with their underwriting portfolios.
Insurance-related emissions are an additional note in the GHG Protocol scope 3 category 15 (Investments). It represents the portion of an insured's total emissions associated with the re/insurer's underwriting portfolio, expressed in tCO2e.
From PCAF Standards Part C: Insurance-Associated Emissions, launched in November 2022.
THE PATH FORWARD
As the world moves towards a sustainable future, the role of insurance companies is becoming increasingly critical. By integrating a comprehensive ESG risk management framework, promoting a just transition, and adopting robust measurement frameworks like PCAF, insurers can help shape a more resilient and equitable economy. However, the path forward requires ongoing commitment, innovation, and a willingness to address both environmental and social challenges head-on. The experiences of Swiss Re, Aviva, and AXA offer valuable lessons, demonstrating that while progress is possible, it is neither easy nor straightforward.
GC Insights is committed to providing customized strategies and tools to help insurance companies navigate the complexities of integrating ESG (Environmental, Social, and Governance) considerations into their practices. Our expertise in environmental, social, and governance risk management ensures that insurers can effectively align their operations with sustainability goals, drive impactful change, and stay ahead in a rapidly evolving market and compliance challenge. Companies can leverage best practices and innovative solutions to accelerate their just transition with GC Insights.