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Pressure grows on insurers to cut fossil fuel investments

Hand on a fuel pump as pressure grows on insurers to cut fossil fuel investments
Posted January 25, 2018

David Worsfold

The pressure on insurers and their CIOs to move investments away from fossil fuels has been building up steadily since the Paris climate change summit in September 2015.

This led to the European Union setting up the High-Level Expert Group on Sustainable Finance which had a lot to say about how insurers must adapt investment strategies and underwriting to support climate change initiatives and green industries when it published its interim report in July last year.

Now it is consulting widely on how insurers, asset managers and institutional investors should embrace environmental, social and governance (ESG) factors with even more commitment when taking decisions. This will lead to a final report to the European Commission before Easter. It is expected to contain some tough targets for insurers to accelerate redirecting investments away from fossil fuels and polluting industries and into new, green industries.

Insurers are already responding to the climate change and green economy agenda, says Maryam Golnaraghi, head of extreme events & climate risk at the Geneva Association, the insurance industry’s leading international think tank.

“Our research shows that climate change is definitely an issue that the industry is addressing but there is a range of different priorities and emphasis. What we do know is that it still requires a cultural shift and systematic co-operation among a variety of stakeholders if we are serious about addressing climate change and transitioning to a low carbon economy at scale.

“The insurance industry has several value propositions including pricing, transferring and managing risks and investing its assets. It has liabilities and a fiduciary responsibility to ensure it can meet those. This limits its scope for action as investments must match its liabilities.

“The challenges on the investment side are about divesting from carbon intensive assets and scaling up in sustainable investments. This is aligned with the work of the EU Expert Group but the industry needs more help from regulators. There is a lack of taxonomy for green and sustainable asset classes. There is a need for consistency to help investors access the right assets.

“Even once we have got the taxonomy right, there are not sufficient amounts of investment grade investible assets of the sort the insurance industry needs. Longer term investment opportunities are needed if the insurance industry is going to move into sustainable investments”.

Despite these challenges, the industry is changing, with several major European insurers announcing initiatives to move away from insuring businesses deriving major revenues from fossil fuels and developing wide-ranging ESG strategies to help re-shape their massive investment portfolios.

Zurich Insurance has recently stepped up its response to the climate change agenda, saying it will no longer insure or invest in businesses with substantial interests in coal: “Fossil fuels is a very broad sector, combining a lot of different technologies and they all have different environmental impacts. Coal is by far the dirtiest and the fossil fuel that has the greatest impact on climate change”, says Johanna Köb, head of responsible investment.

She says Zurich expects to divest away from all coal mining or energy production firms this year: “We are confident that it is doable in 2018”, says Köb.

Allianz is also driving change from the centre, says Debbie Goddard, corporate and social responsibility consultant:

“We believe it is important that an approach to integrating environmental, social and governanceissues into insurance and investment businesses is part of everyday decision-making.

“Over the past years, we’ve developed multiple instruments that allow us to integrate ESG concerns in our underwriting, investment and asset management activities. Which integration instrument we use depends on the type of transaction and asset class. All our ESG integration activities are implemented through group-wide corporate rules on risk management, underwriting and investment.

“A good example of how investment strategies support climate change is the decline in investment in coal, which Allianz has stopped investing in following the two-degree-target of the Paris climate negotiations”.

These initiatives are music to the ears of campaigning groups such as Unfriend Coal which has been working with insurers and believes real progress is starting to be made, says Lucie Pinson, co-ordinator of its European campaign: “It is only in the last two years that the insurance industry has put together the two parts of its business – underwriting and investment – and moved away from coal. We are expecting other insurers to move in a similar way this year”.

She says Unfriend Coal aims to help insurers make informed decisions by developing a database to identify who is behind the coal industry: “We want to help firms make informed, robust investment and underwriting decisions and develop criteria for the industry to adopt”.

While the Geneva Association shares the objectives of moving away from insuring and investing in the worst polluters, Golnaraghi adds a note of caution about moving too fast or too indiscriminately: “A rising number of CIOs are looking into opportunities for investing in green and climate neutral assets but they caution against divesting too suddenly from fossils fuels, because the biggest financial force in developing renewable energy are the fossil fuel companies as that is their exit strategy from carbon. Divesting too quickly could essentially be choking funding for investing in green technology”.

With the High Level Group’s consultation drawing to a close, European insurers will be hoping that they are given the opportunity to develop a constructive partnership with regulators and governments and not find themselves burdened with unrealistic expectations, says Golnaraghi: “Insurance companies are not the polluters or the policymakers, but they are a key part of the solution”.

The ‘E’ in ESG is about to become much more important.

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