“I do think having more women involved, both in the insurance sector and in the context of COP26, would be beneficial”.

Praveen Gupta: Insurers have a responsibility to ensure that their decisions do not contribute to the very risks they are insuring against. They have a responsibility to protect people and planet. However, are ensuring they are not fuelling future climate changes?

Sonia Hierzig: Insurers indeed should have a responsibility to ensure that their business activities do not fuel climate change – after all, it is a risk that could cost the industry billions. A recent report by Swiss Re predicts that climate risks could add over USD 180 billion by 2040 for property insurance costs alone.

Considering this, it is baffling that most insurance companies still seem happy to invest in companies or provide insurance for projects that continue to fuel this crisis. Insure Our Future’s most recent scorecard on insurance, fossil fuels and climate change found that particularly insurers in the US, East Asia and the Lloyd’s market continue to support this sector with few restrictions – despite its clear incompatibility with the goals of the Paris Agreement.

There is a clear inconsistency here. Even if an insurer is not convinced by the moral argument of doing the ‘right’ thing and has little interest in the impact its business activities are having on people and planet, there should still be a very clear financial incentive to act – yet, this is still not taken seriously by many insurers.

PG: In your recent report ranking the world’s 70 largest insurers, you found them seriously wanting. Almost half of the insurers surveyed received the lowest rating?

SH: This is right, 46 per cent of the insurers we surveyed were rated ‘E’. This means that evidence suggests poor management of material risks and opportunities linked to the topics we assessed, including climate change, biodiversity, and human rights. Although there were also some insurers that performed better, not a single one was placed in the top two categories (‘AAA’ or ‘AA’), which shows that even the leaders still have much room for improvement.

There is some reason for hope though: overall, insurers performed best in our questions on ‘Governance’. Many are starting to put in place the right structures internally that should then enable them to improve their performance on various thematic areas; for example, by linking executive remuneration to climate- or wider sustainability-related targets, allocating clear responsibility to board members and providing adequate training and resources. We also found that 13 per cent of analysed insurers have made some kind of net-zero commitment.

This is positive and things are going into the right direction, but the concern remains that all of this is still happening far too slowly, and that we are running out of time. On climate change in particular, the time for adjusting governance structures and making big long-term promises on net-zero really was yesterday, and we need insurers now to jump straight into action.

PG: Do you see any marked contrast between the underwriting and investment policies of the insurers studied by you?

SH: Yes, there was quite a contrast. Performance on investment is generally better than on underwriting for insurers with a P&C business. We found this quite surprising, considering it is the core role of the insurance industry to manage uncertainty and thus enable their clients to take greater risks than they perhaps otherwise would. One might expect that the types of systemic risks we explored would be an essential part of the analysis that feeds into development and pricing of products. This does not appear to be the case – instead, insurers’ approach in terms of their investment activities is more advanced.

One reason for this might be that insurers have been able to learn from other asset owners and asset managers how to incorporate ESG issues into investment decisions and have benefitted from the general mainstreaming of sustainable finance, while the underwriting side requires a much more insurance-centric approach.

PG: Are you enthused by the creation of the Net-Zero Insurance Alliance (NZIA)?

SH: Well, considering the relative lack of progress on the underwriting side, this new Net-Zero Insurance Alliance indeed seems like good news. More focus on underwriting activities is sorely needed. Generally, I think the willingness among financial institutions to collaborate and share knowledge on sustainable finance issues is quite commendable.

I am, however, a little bit cautious and don’t want to be too jubilant just yet: so far, the initiative has mainly set ambitious targets, but many questions remain around how they will be implemented. From our conversations with insurers, it seems obvious that no one yet clearly knows what it means to be a net-zero underwriter, and the Alliance leaves much to the signatory companies’ discretion. So, as usual with such initiatives, the proof will be in the pudding.

PG: How are insurers performing on the Environmental Societal and Governance (ESG) scale?

SH: Climate change is definitely the slightly more established topic, while consideration of other ESG issues is still relatively nascent. Some insurers have started to consider human rights, with just under a third now having some kind of human and/or labour rights policy. We hope that more insurers will start to follow this trend: so far, most of the world’s largest insurers still show severe negligence of their impact on human and labour rights.

The least well-covered topic of those included in our survey was biodiversity. The vast majority of assessed insurers have not yet developed an approach to managing nature-related risks to their portfolios and show little understanding of how their investment and underwriting activities are affecting, or may be affected by, the biodiversity crisis. This topic has close linkages with climate change, and so we hope the fact that more is being done on climate, as well as the upcoming Convention on Biological Diversity, will increase insurers’ awareness of this issue and inspire action.

PG: How can regulations be made more conducive to facilitate the desired transition?

SH: At ShareAction, we actually recently published a briefing which explains what policymakers can do, particularly within the context of the EU and the upcoming review of Solvency II. In particular, we make seven key recommendations:

1. Require a double materiality approach: considering both financially material sustainability risks (outside-in) and a company’s own sustainability impacts (inside-out) in financial decision-making.
2. Clarify the new prudent person principle: make it clearer that sustainability risks should be considered as part of insurers’ fiduciary duties.
3. Embed responsible stewardship practices: require stewardship policies, practices and reporting for investment and underwriting activities.
4. Incorporate ‘impact underwriting’: requiring insurers to develop sustainability-related underwriting policies.
5. Board oversight – ‘tone from the top’: requiring board-level oversight of the development and integration of the sustainability strategy.
6. Strengthen reporting requirements: making the Task Force on Climate-Related Financial Disclosures (TCFD) mandatory.
7. Align prudential requirements with the high risks posed by unsustainable activities: particularly in relation to fossil fuel assets and policies that cover policyholders engaged in fossil fuel-related businesses.

PG: Do you expect any special focus on insurance at the forthcoming COP26?

SH: The insurance sector will definitely be a big topic. The Glasgow Financial Alliance for Net Zero – another net-zero alliance – includes many insurers, including the NZIA. As with other such initiatives, they’re also quite focused on commitments – although they do also have an element that is focused on technical collaboration on substantive and cross-cutting issues that will hopefully lead to some more practical and action-oriented next steps.

As we have seen with the large number of extreme weather events this year, including increasingly intense and devastating floods and wildfires, action cannot come too soon. As such, I really hope that this year’s COP serves as a wake-up call for all those insurers that still need one and encourage those insurers that are already acting to further increase their ambition.

PG: Your thoughts about women in leadership roles?

SH: There is definitely insufficient gender diversity at insurers at the moment, with only 25 per cent female representation at board level among the insurers we analysed. Slightly promising is that gender diversity is the second most common human rights-related engagement topic insurers raise with investee companies – although that is still only done by 11 out of the 70 insurers.

I always think it’s quite telling that the finance sector in general is quite dominated by men, whereas, in the NGO-space, most organisations are either split quite equally or employ more women. This appears to indicate that women generally tend to care more about sustainability and making the world a better place – although of course there may be many other reasons for this difference in gender representation too.

Beyond my own subjective observations, there’s also some proper studies that have been done that appear to show that more women in leadership positions leads to positive outcomes: research has shown that strong growth among European companies is most likely to occur where there is a higher proportion of women in senior management teams. Companies with more women on their boards have also been found to outperform their rivals with a 42% higher return in sales, 66% higher return on invested capital and 53% higher return on equity.

So in short, I do think having more women involved, both in the insurance sector and in the context of COP26, would be beneficial – although of course it would not be the only factor that could make a difference.

PG: Grateful for these first-hand insights, Sonia. Hoping that all your endeavours lead to a world in which financial institutions use their influence to actively contribute to society’s goals.