(Wednesday 26 May, London) — Insurance companies are lagging behind the finance sector’s push to embrace ESG investment, with few of the world’s largest insurers considering climate change, biodiversity loss and human rights violations in their underwriting decisions.
A new ranking by ShareAction gives the lowest ranking – an E – to almost half (46%) of the world’s 70 largest insurers for their sustainability practices.
US companies performed poorest of all, with five US insurers - Nationwide, AIG, Allstate, Genworth Financial and Protective Life Insurance Company - appearing in the bottom 10 of the ranking. The five companies scored less than 4% each across the four categories of governance, climate change, biodiversity and human rights.
Fossil fuel policies incompatible with net zero
Coal finance emerges as one of the few ESG issues insurers are starting to address: Almost half the insurers with a property & casualty business were found to have policies restricting underwriting for the coal industry. These policies are starting to have real world impacts: BMD Group admitted this month that it had been unable to obtain insurance for its work on the controversial Adani coal mine in Australia. This came a month after climate campaigners dumped coal outside the headquarters of Lloyds of London, illustrating the pressure campaigners are exerting on this issue.
But just 19% have similar policies restricting underwriting of tar sands, shale oil or Arctic oil exploration. And not a single insurer was found to have any restrictions for underwriting conventional oil and gas operations.
The findings come a week after the IEA announced that there can be no new oil, gas or coal development if the world is to reach net zero by 2050. And in April Swiss Re published research showing that climate change could cost the global economy $23 trillion by 2050.
Underwriting lags behind investment
ShareAction found that 11 insurers have net zero targets for their investment activity. But only two have set net-zero targets for their underwriting activities and neither has published a plan outlining how they will achieve this.
This reflects a general trend, whereby insurers’ ESG performance on underwriting is consistently poorer than on investment activity.
ShareAction said, “This finding is surprising... One might expect that the types of systemic risks explored in this survey would be an essential part of the analysis that feeds into development and pricing of underwriting products. This does not appear to be the case – instead, insurers’ approach to investment 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.”
The finding reflects recent comments made by Aviva chief executive Amanda Blanc, warning that the insurance industry cannot “speak with a forked tongue” on global warming by doing one thing with its investment portfolios and another with the products it sells. “The underwriting needs to catch up with the investments,” she said. “We can’t be saying we want to take the premium but we’re not going to invest in these organisations. That would just be incoherent”, said Blanc. Yet ShareAction finds this incoherence is prevalent throughout the industry.
Asset managers have been the primary target of sustainable finance campaigners such as BlackRock’s Big Problem. Yet the insurance sector appears to be lagging even further behind.
Last March ShareAction ranked the 75 largest asset managers on responsible investment, with 19% of companies receiving an E rating. Since then many asset managers have markedly improved their ESG performance, for example by supporting more resolutions at company AGMs. Yet over a year later, almost half (46%) of insurers are E rated, suggesting the insurance industry is well behind the curve of the financial sector as a whole.
Report author Felix Nagrawala said: “Insurers are better placed than any other type of financial institution to exert pressure on unsustainable companies, as firms cannot operate without insurance. But they are largely failing to use this influence. Despite the sector’s supposed expertise in managing risk, insurers continue to ignore the systemic risks of climate change and biodiversity loss.”
Bill McKibben, co-founder of 350.org, said: “The insurance industry is the single most annoying part of this whole climate puzzle: they possess all the data about what global warming is doing to our earth, and yet they keep underwriting the industry that drives the damage. If they stay involved with coal and oil and gas, then the only thing they truly insure is our destruction.”
On human rights, just 13% of insurers have a policy to exclude investment in companies that are knowingly in breach of human and labour rights. ShareAction said, “This suggests that the majority of the insurance industry is willing to turn a blind eye to direct and deliberate corporate human and labour rights violations.”
On biodiversity, not one of the assessed insurers has set any nature-related targets, such as those relating to deforestation, hazardous waste or water use across their portfolio.
Insurers’ poor performance on the thematic areas of climate, biodiversity and human rights may be partly explained by governance failures. ShareAction found that “Insurers’ boards are ill-equipped to appropriately manage the environmental and social impacts of their organisations.” Just 17% per cent of companies were found to have a board member with sustainability-related expertise, and only 19% per cent have board level KPIs or objectives linked to responsible investment and underwriting.
Transatlantic divide reflects differing policy environments
Particularly poor performance was observed among insurers based in the USA, with 75% given the lowest rating. No US insurer has a human rights policy and just one – Liberty Mutual – has imposed any restriction on coal finance.
ShareAction said the transatlantic divide was “likely attributable to the strong regulatory signals on sustainable finance within Europe”, noting that there has been “far less progress on sustainable finance legislation in the US.”
That may be about to change, however. In March, four US Senators wrote a letter to US insurers challenging them on their poor climate performance relative to international peers. And the Biden administration is currently preparing an executive order that will instruct the Federal Insurance Office to address climate risk. “As the Biden administration prepares its executive order on climate risk, these rankings show they have their work cut out to bring the US into line with European standards”, said Nagrawala.
Three European insurers – Axa, Allianz and Aviva – lead the ranking of insurers with a property and casualty business, each receiving an A rating. All three have climate policies that cover their underwriting activity, as well as restrictions on financing coal companies and those in breach of human rights.
But even these three companies scored less than 50% overall. ShareAction said, “No insurer demonstrates leadership across its entire responsible investment and underwriting approach. For that reason, no insurance company was awarded a AAA or AA rating.”
Following publication of the report, ShareAction will provide tailored feedback and offer ongoing engagement to each company to help them improve their performance.
Céline Soubranne, Group Chief Sustainability Officer at AXA, said:
“AXA’s position at the top of ShareAction’s global insurance ranking evidences the strong governance of sustainability-related topics across our investment and underwriting business, which is foundational to the robust management of social and environmental risks and impacts. While we are proud to be recognised for our firm commitment to cross-industry collaboration, effective active ownership, and leadership on biodiversity-related issues, ShareAction’s ranking shows that there is still a long way to go for the sector at large. We welcome the publication of this ambitious global assessment and hope that it propels the industry into action to meet the era-defining challenges of climate change and biodiversity loss.”
Nigel Wilson, CEO of Legal & General, said:
“We are delighted to be recognised as an industry leader in ShareAction’s global ranking of insurance companies. Institutional investors must rise to the challenge of the climate crisis. Legal & General is doing this by increasing pressure on companies globally as we push for the net zero impacts that are required to limit the effects of climate change. We’re matching words and deeds: our longstanding commitment to active ownership and transparency means that we will continue holding companies accountable. We will continue working with policy-makers and regulators globally to develop solutions to market-wide issues including effective climate action. And we will continue to invest our own capital in the transition to a low-carbon economy. ShareAction’s recognition demonstrates that these commitments are at the very heart of our stewardship and investment practices.”
Notes to editors
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ShareAction is a responsible investment NGO working to make the financial system a force for good. Through research, policy advocacy and campaigns, it encourages investors to use their influence over companies to tackle environmental and social challenges.