As environmental, social and governance 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 launch of the UN-convened Net-Zero Insurance Alliance (NZIA) in July 2021 reflects the global industry’s wider recognition of climate risks.
The NZIA was founded by eight of the world’s biggest insurers and reinsurers that are committed to transitioning their underwriting portfolios to net zero by 2050. AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich were 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 insurers “have a key role to play in catalysing decarbonisation of the global economy and investing in climate resilience”. As of early 2022 another 15 insurers had joined the NZIA.
The NZIA’s commitment includes the implementation of science-based intermediate targets at five-year intervals to measure progress, to be disclosed publicly on an annual basis. Members will set independent underwriting criteria and standards, especially in greenhouse gas-intensive industries; engage with clients on decarbonisation strategies; and develop products for low- and zero-emission technologies. Moreover, they will improve claims management in an environmentally sustainable manner; integrate independent, company-specific decarbonisation risk criteria into their risk-management framework; and advocate for policies that facilitate an equitable transition to net zero.
Exit from Coal
Insurers are already playing an instrumental role in curtailing coal use. In February 2021 France’s Société Générale published a report noting that coal projects are not economically viable without insurance. “The insurance industry can, almost single-handedly, exert pressure on coal energy producers, which other industries are less well placed to do,” it said. It also found that shunning coal could add billions of dollars to firms’ shareholder value.
A February 2020 report from ratings agency Moody’s came to a similar conclusion, noting that a retreat from coal protected against climate change liability and risk to investment assets. “For insurers, carbon-intensive customers that cannot adapt to a low-carbon economy are a source of insurance risk as well as a liability risk,” it wrote. “For example, coal mining or power generation companies facing secular decline in demand… might be incentivised to reduce maintenance expenditure.” A 2021 Munich Re report found that climate change-related natural disasters cost the industry $82bn in 2020.
While it has yet to commit to a net-zero target, Qatar pledged in October 2021 to achieve a 25% reduction in emissions by 2030, as well as to reduce the carbon intensity of its liquefied natural gas facilities by 25%. Elsewhere in the Gulf, the UAE, Saudi Arabia and Bahrain have all made net-zero commitments, either by 2050 (UAE) or 2060 (Saudi Arabia and Bahrain). Although they have made significant efforts to reduce emissions, Saudi Arabia and the UAE both see a continued role for oil and gas. Saudi officials said that too rapid a shift away from fossil fuels would leave many emerging markets without reliable sources of energy, and that the transition to net-zero carbon emissions “will be delivered in a manner that preserves the Kingdom’s leading role in enhancing the security and stability of global energy markets”.
The path to net zero is a complex matter for the Gulf, where many countries rely on the hydrocarbons industry. Although all GCC members have long-term programmes aimed at diversification, energy nevertheless comprises a significant share of economic activity. Plans to continue developing hydrocarbons projects have attracted concern from some environmental activists, who fear that the continuation of production and reliance on carbon-capture technology may not be as effective as many suggest. Others were more optimistic, highlighting the significance of some of the world’s biggest producers committing to net zero.
By late 2020 at least 65 global insurers with total assets of $12trn had committed to either divesting or making no new coal investments, up from $4trn in 2017. European and Australian firms have been frontrunners in this regard. In 2019 Australia’s Suncorp said it would no longer invest in, finance or insure new thermal coal mines or power plants, or 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 2021 South Korea’s three major non-life insurers announced they would no longer provide coverage for new coal power projects. More recently, in December of that year Hong Kong-based AIA Group became the first major Asian insurer to divest from coal.
US insurers, for their part, lag behind: few have taken any meaningful action, and they had a combined $90bn invested in coal in mid-2021. There has been progress, albeit slow: in October 2021 AXIS Capital became the first North American insurer to pledge to phase out coal, announcing it would restrict insurance and investment in coal, tar sands oil, and Arctic oil and gas, to facilitate the transition to a low-carbon economy.
Many in the industry anticipate that it will now move away from oil and gas. In August 2021 Suncorp became the first major global insurer to say it would no longer directly finance or insure new oil and gas projects. In early 2022 France’s CNP Assurances made a similar pledge, and in March Swiss Re said it would phase out support for any oil and gas companies without credible net-zero plans by 2030. It is clear that momentum is growing, and the rapid shrinkage of the coal market is a sign of insurers’ ability to drive decarbonisation.
The industry’s shift away from hydrocarbons will serve to support other countries’ energy transitions. Many emerging economies are already increasing investment in clean power. In July 2021 two environmental think tanks published a report forecasting that 88% of growth in electricity demand in 2019-40 would 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 countries will leapfrog directly to renewables, without building up energy infrastructure based on fossil fuels.
A number of emerging markets have already made such a transition. For example, Egypt and Argentina have leapfrogged from gas to solar and wind, without passing through nuclear power or hydropower, which would have constituted a more traditional, linear development in their energy mixes. However, there remains a lack of capital for emerging markets to develop renewable capacity. While some $2.6trn was invested in renewables between 2010 and 2019, among emerging markets only China, India, Brazil, Mexico and South Africa were able to secure investment of over $20bn.