Insurance companies are vulnerable to global warming on both sides of their balance sheet, facing higher weather-related claims and the need to decarbonize their assets – while also meeting growing regulatory and solvency requirements.
Their enthusiasm to do something about it was highly evident in the 2022 Robeco Global Climate Survey. It showed that 84% of investors have put climate change as a central or significant factor in their investment policy over the next two years, up from the 34% who said this two years ago.
Some 59% of insurance companies have now signed up to the Net Zero Carbon pledge, which commits asset owners to making their assets carbon neutral by 2050.
“That's a huge amount of investors who are saying they're going to reduce the carbon in their portfolios by around 25% over the next five years,” says Collinge. “If you include those who are investigating it as well, basically 90% of insurance companies are on the verge, or have already signed up to, net zero.”
“It means that in all, firms controlling about USD 12 trillion of assets are now committed to the Net-Zero Asset Owners Alliance, including many of the world’s largest insurers. That’s going to make a massive difference, particularly as we move in sustainable investment from ESG integration to a broader desire to make a real-world impact.”
Looking at the SDGs
Robeco’s Global Insurance Solutions team has been busy helping insurers with means of decarbonizing portfolios but without necessarily compromising returns. One means of doing this is by focusing solutions on the UN’s Sustainable Development Goals. Several of the SDGs are related to combatting global warming, led by SDG 13 (climate action).
“Building this into the modeling for insurer portfolios has been really exciting,” says Collinge. “Recently we've been working with UK insurers who’ve picked a number of the SDGs, where things like climate action, health and well-being mean something to them.”
“They want to have a structural overweight in their public credit portfolios to firms that are making a positive impact to one or more of the SDGs. Using our SDG Framework, we can show an insurance company what the expected impact on returns will be by making these choices. It means we can offer innovative solutions to meet distinctive challenges.”
Strong showing for biodiversity
Biodiversity also figured strongly in the climate survey, with 48% of insurance companies saying they were committed to reducing the system risks associated with biodiversity loss.
“This was quite an interesting outcome…. you can focus on climate and getting to net zero, but that doesn't really help us if we've destroyed all the rainforests and the natural ecology of the planet,” says Collinge.
“Biodiversity is actually a natural extension of the focus on climate. The regulators, in France, for example, now require insurance companies to have a policy on biodiversity. It only makes sense that as more people are focused on climate, then biodiversity comes to the fore.”
Divestment versus engagement
Opinions do differ though on one of the more contentious issues facing all investors – whether to divest directly from fossil fuels. While this offers an instant means of decarbonizing your portfolio, it does not solve the underlying problem of emission to which insurers are still heavily exposed.
“If you sign up to net zero or moving to a lower-carbon world, there are two things you can do, says Collinge. “You can make a proactive choice to change your investment portfolio, which is where 22% of investors in the climate survey are saying they'll exclude the majority of the energy sector, because clearly that will mean a big reduction in CO2 in their portfolios.:
“But that doesn't get rid of the core problem, because for us to get to net zero, we need to change the companies operating in the underlying economy. We’re doing that through active engagement and active ownership; if you no longer invest in energy companies, then you lose your voice, and the ability to change these companies.”