Called Got it covered? Insurance in a changing climate, the report by the Asset Owners Disclosure Project (AODP), part of responsible investment organisation ShareAction, examines 80 of the world’s largest insurers, with assets worth $15 trillion. Based on their management of material climate risk, insurers are rated from AAA if they show climate leadership, to D if their approach is limited. The lowest X rating is given to those showing no evidence of addressing climate issues.
Results show that the UK takes two of the top four spots in the climate leaders category. The top-rated insurance firms are AXA followed by Aviva, who received a AAA rating, and Allianz and Legal & General, who were awarded AA. Legal & General was also the most improved insurer in the index, moving up eight rating bands from last year. Japanese firm Tokio Marine also shot up six rating bands to a BBB rating, having been rated D in 2017.
AODP analysed insurers’ disclosures based on industry (TCFD) recommendations covering: climate strategy, climate risk management, and targets. The research drew on both publicly available information and private survey responses.
The report records improvement in the rating of Japanese insurers since the last survey in 2017, driven by their transparency on climate-related risks. Over a third of assessed insurers have jumped to a higher rating band, with Tokio Marine joining the leaderboard as the only non-European insurer. Four Japanese insurers rank above the highest-ranked US insurer. One factor that could have contributed to this is the ‘ripple effect’ on the Japanese financial ecosystem created by Japan’s largest asset owner, the Government Pension Investment Fund, integrating environmental, social and governance factors into its investment processes.
In contrast, all but three of the assessed US insurers received D or X ratings, the two lowest ratings, including Prudential Financial and AIG, who scored a D. This is in spite of climate disclosure rules being in place since 2010, much earlier than in Europe. In the results of the first industry stress test of its kind, published by California’s Insurance Commissioner Dave Jones earlier in May, analysed insurers were revealed to be heavily exposed to coal, with portfolios consistent with a trajectory of six degrees of global warming. The famous statement made by Thomas Buberl, the Chief Executive of AXA, that a four-degree world is not insurable makes this climate risk negligence by the US insurers look particularly culpable.
In Europe, an active debate around climate disclosures as well as pressure from civil society help explain why European insurers continue to dominate the 2018 leaderboard. Mark Carney, the Governor of the Bank of England, was the first regulator to acknowledge climate change as a financial and potentially systemic risk. Mark Carney’s address to the insurance sector in 2015 singled out the industry as fundamental to economic and social stability in the face of climate change.
However, even European insurers’ efforts have been slammed by campaigners, who deem them insufficient to keep global temperature rises to well below two degrees Celsius. Insurers are some of the world’s largest institutional investors; their investments and underwriting activities affect a multitude of communities and economies. Global campaigners, such as Unfriend Coal, point out that even top-rated insurers in AODP’s leader category do not always exercise their power as shareholders and underwriters but instead continue supporting high carbon businesses whose activities are inconsistent with the globally agreed two-degree goal.
In terms of low-carbon investments in assets like renewable energy, AODP has calculated the aggregate allocation to be roughly $70bn, less than 0.5% of assets and dramatically shy of the $1.1trn needed per year by all parties in order to transition at pace towards a prosperous low-carbon economy. Over two thirds of European insurers and considerably fewer American and Asian insurers report publicly on their low-carbon investments, with the European average being 0.79% of total assets. Christiana Figueres, a former Executive Secretary of the UNFCCC, had issued a challenge to institutional investors to allocate one per cent of their total assets into clean technologies and renewable energy by 2020. One per cent is a modest ask, yet the majority of assessed insurers are not yet close to it.
It is now two years since the then UN Secretary General Ban Ki-moon urged the insurance industry to address climate risks by doubling sustainable energy investments while decarbonising existing portfolios and supporting the Sustainable Development Goals. AODP’s analysis found that only six to eight per cent of the assessed insurers have met all these challenges; the majority fail on all three of Ban Ki-moon’s challenges.
Pavel Kirjanas, AODP Project Manager at ShareAction and report author, says: “This year, AODP has put the insurance industry in the spotlight. We applaud the leading and innovative approaches taken by the sector’s leaders. Unfortunately, there is no time to celebrate. While the world is being shaken by climate-induced catastrophes, the world’s largest insurers keep pressing the snooze button. US insurance companies seem complacent about portfolios that put us on a disastrous six-degrees pathway.” He added, “This is no longer a matter of forming a climate belief, it’s a matter of responding to facts. The world is transitioning to a low-carbon economy at an unprecedented pace. Climate ignorance is simply not prudent.”
Dave Jones, California’s Insurance Commissioner, says: “We look forward to using the information contained in this report as we monitor insurance companies’ response to climate risk and as we consider additional regulatory steps to make sure that insurers are considering and addressing climate risks. Further, making climate risks transparent will help ensure that climate-related financial issues are routinely reflected in business and investment decisions.”
Sue Reid, Vice-President for Climate & Energy at Ceres, says: “If major US insurers continue to lag behind their global peers on addressing climate-related risks, they will be unable to deliver on their promise of providing a crucial safety net for their customers. This report provides a compelling wake-up call: to build resilience, insurers in the US and around the world must integrate climate risk considerations into their products and investments alike, without further delay.”
Jad Ariss, Group Head of Public Affairs and Corporate Responsibility at AXA: “Being a sector leader of the 2018 AODP Insurance Index is a recognition of AXA’s commitment to address climate change both as an insurer and an investor, in line with the TCFD recommendations. Indeed in 2018, we have published our first comprehensive climate-related investment and insurance report leveraging innovative indicators to assess climate-related financial risks and opportunities.”
Zelda Bentham, Group Head of Sustainability at Aviva, says: “We continue to value the work and insight that the Asset Owners Disclosure Project report provides and would like to the thank the AODP for awarding Aviva a AAA rating in their Global Climate Index of Insurance Companies. It is clear from the report that there is much more to do. Increased action on addressing climate risk is needed throughout the insurance sector value chain, on both the asset and liability side, if we are to continue in our role as society’s risk manager.”
Katharina Latif, Head of Corporate Responsibility at Allianz, says: “As an institutional investor and insurer we are supporting the transition to a low-carbon economy with both our insurance solutions and investments. Climate action is a strategic priority for us and we, therefore, engage investee companies as well as international policy-makers to walk the talk. Our recent climate action announcements are another proof point for Allianz’s leadership position in AODP’s ranking. We hope the report helps more peers develop ambitious climate strategies.”
ClientEarth Insurance Industry lawyer Stephanie Morton says: "The AODP report demonstrates that insurers are beginning to internalise the significance of climate-related financial risks. It is also clear that there is a long way to go. Insurers are heavily exposed to the risks of climate change: extreme weather events are becoming more intense and as efforts to mitigate climate change step up, we are seeing a growing risk of stranded assets - investments that don’t end up delivering returns. Insurance professionals and those who advise them need to be factoring these realities into their underwriting and investment decisions. Many insurers are still perilously exposed to the systemic financial risks posed by climate change. This could severely undermine the stability of the sector, with grave consequences for society."
Peter Bosshard, finance program director at the Sunrise Project and coordinator of the Unfriend Coal campaign, says: "The AODP report shows that the insurance industry is starting to take the risks of climate change to their insurance services and investments more seriously. Going forward, responsible insurers need to urgently address the reverse risks which their investments and insurance services for the fossil fuel industry pose to the climate."
• AXA, Aviva, Allianz, and Legal & General come top in a new global insurance ranking on climate.
• Progress across the industry as a whole leaves the Paris Agreement goals currently unattainable.
• All but three US insurance firms assessed have no plans in place to decarbonise their portfolios or address climate-related financial risks.
• Japanese insurers have made notable improvements on climate risk disclosure, and now rank above US firms in addressing climate risks in their portfolios.
• Less than 0.5% of assets invested by the world’s 80 largest insurers are in low-carbon investments that provide solutions to climate change, despite the insurance sector being highly exposed to its financial risks.
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