Economic Update

– Leading insurers are moving to net-zero greenhouse gas emissions policies

– Companies are increasingly turning their backs on coal in particular

– Emerging markets are shifting to renewables, with potential to leapfrog fossil fuels

As environmental, social and governance (ESG) concerns become increasingly important in the corporate world, insurance companies are emerging as potentially key players in the shift away from fossil fuel-powered projects.

The recent launch of the UN-convened Net-Zero Insurance Alliance (NZIA) reflects an ongoing sea change in the global insurance industry.

Inaugurated in July, the NZIA brings together eight of the world’s biggest insurers and reinsurers, each of which are committed to transitioning their underwriting portfolios to net-zero greenhouse gas emissions by 2050.

NZIA’s members – AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich – will set science-based intermediate targets every five years and report annually on their progress.

All eight are already members of the Net-Zero Asset Owner Alliance. Also convened by the UN, this group of 53 institutional investors has been working towards science-based 2025 decarbonisation targets since early 2019. According to its manifesto, pension funds and insurance companies “have a key role to play in catalysing decarbonisation of the global economy and investing in climate-resilience”.

A shrinking market

One area in which insurers are playing a particularly instrumental role is in curtailing global coal use.

Earlier this year, French multinational bank Société Générale published a report which noted that coal projects are not economically viable without insurance. It noted that, for this reason, “the insurance industry can, almost single-handedly, exert pressure on coal energy producers, which other industries are less well placed to do”.

Globally, many insurers have already taken significant steps to divest themselves of coal. By the end of 2020 at least 65 insurers with total assets of $12trn had committed to either divesting or making no new coal investments; this figure was $4trn in 2017.

European and Australian firms have been frontrunners in this regard. For example, in 2019 Australian insurance giant Suncorp announced it would no longer invest in, finance or insure new thermal coal mines or power plants, and that it would not underwrite any existing thermal coal projects after 2025.

Asian insurers have been slower to take action on coal, but there are signs this is changing. For instance, in June South Korea’s three major non-life insurers announced they would no longer provide coverage for new coal power projects.

Meanwhile, insurers in the US are lagging behind: few have taken any meaningful action, and US insurance companies still have a combined $90bn invested in coal.

In overall terms, however, significant progress has been made on coal. Many in the industry now anticipate that it will now begin to move away from oil and gas.

So far, Suncorp is the only major global insurer to have said it will no longer directly finance or insure new oil and gas projects, an announcement the company made in August last year. It is also set to phase out financing and underwriting for oil and gas exploration or production by 2025.

Nevertheless, momentum is growing, and the rapid shrinkage of the coal market is a sign of insurers’ ability to drive decarbonisation.

Decarbonising emerging economies

The insurance industry’s shift away from hydrocarbons will serve to accelerate numerous countries’ energy transitions.

Many of the world’s emerging economies are already increasing their investment in clean power.

In July two environmental think tanks – the UK’s Carbon Tracker and India’s Council on Energy, Environment and Water – published a report forecasting that 88% of growth in electricity demand between 2019 and 2040 will come from emerging markets.

Given that renewable energy is cheaper than fossil fuel-based energy in 90% of the world, the report argues that many such countries will leapfrog directly to renewables, without building up energy infrastructure based on fossil fuels.

Many emerging markets have already made such a transition. For example, the report observes that Egypt and Argentina have leapfrogged from gas directly to solar and wind, without passing through nuclear or hydro, which would have constituted a more traditional, linear development.

Meanwhile, countries like Kenya or Nigeria could avoid fossil fuels altogether and roll out an entirely renewables-based grid.

However, the report notes a lack of sufficient capital for emerging markets to develop their renewable capacity.

Some $2.6trn was invested in renewable energy between 2010 and 2019, but among emerging markets, only China, India, Brazil, Mexico and South Africa were able to secure investments of more than $20bn.

However, with institutional investors such as insurers increasingly looking to boost their ESG credentials by favouring renewables, this situation is likely to change.

A complicating factor is persistent uneven demand for certain fossil fuels across emerging markets.

For example, China and India today account for 65% of global coal demand; by contrast, it is anticipated that by 2025 the EU and the US will account for less than 10%.

Indeed, China is the only major economy in which demand for coal grew in 2020, and in India coal mining generates more than half a million jobs.

These examples give a sense of some of the challenges associated with implementing a comprehensive energy transition among emerging markets. However, in light of its defining influence, the insurance industry’s ongoing shift away from coal is a cause for optimism.