Insurers have been told they have a key role to play in supporting the transition to a more sustainable economy

A report from credit rating firm Fitch Ratings concluded that insurers will be the driving force for change as sustainability becomes a more important part of businesses’ operational risks.

It described insurers as “green economy enablers”, adding that as investors, insurers are demanding more environmental, social and governance (ESG) transparency from investee companies, as well as encouraging them to adopt strategies that support the net zero carbon targets defined in the Paris Agreement.

The Paris Agreement, which was signed in 2016, sits within the United Nations Framework Convention on Climate Change and discusses climate change mitigation, adaptation and finance.

“A long-term investment focus means insurers are particularly well placed to channel investment into infrastructure projects, notably in the area of renewable energy,” added Fitch.

“Insurers can design products to reduce some of the risks inherent in infrastructure projects and therefore increase their attraction to investors.

“The ability to help channel investment into sustainable projects is viewed as a sizeable growth opportunity for the insurance sector.”

Green bonds

The report, ‘Insurance – Is the Future Green?’, was created following a webinar on the same topic held by Fitch Ratings, in which participants agreed that the insurance sector could be essential in developing a more sustainable global economy.

While insurers are viewed as marginal issuers in the green bond market, their green issuance is set to grow, especially as attracting ESG investors boosts order books and achieves better pricing for green bonds.

“In addition, inaugural green bonds are a strong opportunity for insurers to signal their ESG credentials and highlight their sustainable investment strategies,” Fitch added.

Climate change risks

Climate change stress tests will be performed by insurers in France and the UK, said the report, with results expected in April and June 2021 respectively. This will paint a clearer picture of the extent to which the insurance sector is exposed to climate change risks.

“Neither test will result in automatic changes to prudential solvency requirements, but Fitch believes additional capital charges could be introduced over the medium term given the increased impact of natural catastrophes on insurers’ claims ratios and financial profiles,” the report added.

“The tests are a learning exercise and will help inform market participants about data gaps, business model vulnerabilities, weaknesses in risk management and management knowledge gaps.

“In our view, uncovering these areas is as important as being able to quantify the risks.”

Having an ESG focus

Fitch said that companies that already integrate ESG principles into their strategies are better placed to attract investment.

Insurers, for example, are increasingly integrating ESG factors into their underwriting and investment criteria, as well as implementing a number of screening and exclusion policies and due diligence processes focused on sustainability objectives.

Most businesses recognise the limitations of relying on external ESG ratings and products and have instead built up strong in-house ESG analytical teams to assess investment opportunities.

Investee companies often struggle to provide ESG data, but Fitch Ratings’ panellists were clear that a failure to provide information is a negative.

In fact, disclosure requirements are becoming tougher and minimum investment criteria thresholds often require investee companies to provide measurable data relating to carbon footprints, pathways for reducing these and strategies for promoting sustainability.

Insurers participating in the webinar also highlighted the impact they can make on sustainability trends by maintaining dialogue and engagement with investee companies, to encourage them to adopt more sustainable business models.