We haven't talked about ESG or net zero in a while. This is not to say it's not important, but other matters have crowded in ahead, as markets and sentiment prevaricate over each day's new data points.
But the shadow cast by ESG continues to lengthen. On the one hand, many insurers, at least within Europe and to some extent Asia, have made addressing climate change a key plank of their business and investment strategy, while regulators have begun to think of how net zero and other considerations might be integrated into their supervisory frameworks. At the same time, ESG is rapidly becoming a very real business risk today for investors and corporates, with partisan divides opening up and litigation fears taking hold.
Some of the sector’s collective initiatives to support the drive to net zero have started to unravel.
In December last year, Vanguard left the Net Zero Asset Managers Initiative and over the last few weeks several leading insurers and reinsurers have abandoned the Net Zero Insurance Alliance, launched with an upbeat fanfare at the G20 Climate Summit following the creation of the Glasgow Financial Alliance for Net Zero (GFANZ) umbrella group at COP26 in November 2021.
Munich Re, one of the eight founding members, started the exodus and has been followed by Hannover Re and Zurich.
The insurers and reinsurers have said little about their reasons for abandoning the NZIA but a report by Moody’s said Munich Re exited because of “material antitrust risks that limit its ability to pursue decarbonisation goals in collaboration with other insurers”.
Climate campaigners expressed frustration at these developments.
Peter Bosshard, co-ordinator of Insure Our Future, said: “The NZIA has allowed itself to be immobilised by antitrust concerns from the start. “With Munich Re and now Zurich leaving the alliance, insurers have an even bigger direct responsibility to align their businesses with a credible 1.5°C pathway.”
Alongside the growing fear of antitrust risks the sector is concerned about the recent spate of hearings in the US as legislatures divide along political partisan lines on the issue of ESG. Data indicates that climate litigation is rising, but the risk does not just end there.
More widely, political landscapes are shifting, viz the debate in the European Union over its green taxonomy, and the rapid rise of the Farmers Party in the Netherlands. The recent missteps by Walgreens in the abortion minefield in the US post the dissipation of Roe vs Wade led to the cancellation of its contract with the State of California and showed that policy risks are also rising in the social sphere.
Greenwashing is increasingly giving way to greenhushing.
But those are also just the macro winds. Practically, even if committed, how does one execute this ambitious change? Data quality issues, the heterogeneity of ratings and models, inside out vs outside in models, defining decarbonisation in fixed income, monitoring and integrating ESG, coming up with stress tests, debating the right capital framework, and so on – insurers have their work cut out.
Net zero is a challenge. Not just in principle but also in execution, and it will be critical for the industry to think hard about what it means in practice.
- Contributed by Bob Swarup, Founder of the Insurance Investment Exchange, with additional material from David Worsfold, Contributing Editor.
- Our next IIE lunch in May debates what that journey might involve, the challenges and solutions, and the long-term implications.
When: 31 May 2023, 12 noon
Where: Queen Victoria Street, London EC4V 4LA
Save the Date and look out for further details soon.