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 UN’s Net-Zero Asset Owner Alliance (NZAOA) reflects an ongoing change in the global industry towards the wider recognition of the risks associated with climate change. However, the failure of the Net-Zero Insurance Alliance – which launched before the COP26 UN Conference on Climate Change from October-November 2021 but was disbanded in April 2024, with a number of members dropping out before then due to potential antitrust lawsuits in the US – shows the difficulties still facing the industry in its transition away from fossil fuels.
Clean Targets
The NZAOA, which falls under the UN Environment Programme Finance Initiative, brings entities together from around the world to set emissions targets and report annually on their progress. While the collective goal is to reach net-zero emissions by 2050, members have also set intermediate goals for limiting CO output – ranging from 22-32% by 2025, to 40-60% by 2030. Each participating institution pays an annual fee dependent on its assets under management.
As of October 2024 the NZAOA featured 88 asset owners handling a combined $9.5trn, with 82 of them having published targets for reducing emissions. Participants in the initiative include Germany’s Allianz SE, the UK-based insurer Aviva, Japanese entity Nippon Life Insurance Company and the French Public Pension Fund, whose intermediate goals include reducing emissions by at least 45% by 2030 in comparison to 2010 levels.
Exit From Coal
One area in which insurers are playing a role is in curtailing coal use. In February 2021 French multinational bank Société Générale published a report which noted that coal projects are not economically viable without insurance coverage. The publication 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.” Moreover, the report found that shunning coal could add billions of dollars to firms’ shareholder value.
A February 2020 report from credit ratings agency Moody’s came to a similar conclusion, noting that a retreat from coal protected against climate change liability and reduced the risk of investment assets becoming economically unviable due to the presence of carbon-neutral alternatives. “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,” Moody’s wrote. “For example, coal mining or power generation companies facing secular decline in demand for their product might be incentivised to reduce maintenance expenditure.”
However, transitioning away from coal remains a difficult process. In June 2024 a Moody’s report on India’s ongoing energy transition – the country aims to increase its renewables capacity to 500 GW by 2030, a goal that is projected to require as much as $385bn in investment – noted that coal is expected to remain a major component of the country’s energy mix in the near future. According to the report, “[Moody’s] expect India to add 40-50 GW of coal-based capacity over the next five to six years to help meet power demand, which is likely to grow by 5-6% annually over this period.”
Gulf Transition
Saudi Arabia, Bahrain and the UAE have all made commitments to meet net-zero carbon emissions, either by 2050 (the UAE) or 2060 (Saudi Arabia and Bahrain). Although they have made significant efforts to reduce net carbon emissions, Saudi Arabia and the UAE see a continued role for energy in their respective net-zero futures. In releasing its net-zero plan, Saudi officials said that too rapid a shift away from fossil fuels would leave many emerging markets without reliable energy sources, and 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.”
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