How Insurers are Integrating Climate Change into their Investment Decisions

How Insurers are Integrating Climate Change into their Investment Decisions
August 1, 2024 9 mins

How Insurers are Integrating Climate Change into their Investment Decisions

How Insurers are Driving Sustainable Investments

Insurers are some of the world’s largest institutional investors. Recognising their crucial role in driving the global climate transition, they should identify and analyse climate-related risks and opportunities to improve long-term risk-adjusted returns.

Key Takeaways
  1. More insurers are recognizing the critical impact that the transition to a low-carbon economy has for investment returns and risk and, therefore, business performance.
  2. Key drivers for making investment decisions that incorporate climate-related factors include risk mitigation and regulation, but insurers also face challenges involving limited stakeholder demand and resource constraints.
  3. Insurers are incorporating climate-related factors into investment decisions across all asset classes and actively engaging with the companies they invest in to encourage better climate-related practices.

As long-term investors, insurers can help drive the transition to a low-carbon economy. In the UK alone, the insurance industry manages investments totalling £1.8 trillion1. As a whole, Europe’s insurers invest over €10.6 trillion2 in the EU economy. Insurers have a vested interest in responsible investment due to the direct consequences that climate change and a disorderly transition can have on their businesses and policyholders. Last year, the direct economic cost of the physical impacts of natural disasters totaled $380 billion — 22 percent above the 21st century average, according to Aon’s Climate and Catastrophe Insight 2024 report. Most, if not all, insured risks are directly or indirectly exposed to the physical or transition risks of climate change.

This article explores the benefits of responsible investment strategies for insurers and the key factors driving this growing trend.

Responsible investment considers environmental, social and governance (ESG) issues when making investment decisions and influencing companies or assets (known as active ownership or stewardship). It complements traditional financial analysis and portfolio construction techniques.

Responsible investors can have different objectives. Some focus exclusively on financial returns and consider ESG issues that could impact these. Others aim to generate financial returns and achieve positive outcomes for both people and the planet.

Source: The Principles for Responsible Investment (PRI)

Mitigating Climate-Related Risks

There is a direct benefit to insurers if the net zero transition is orderly and driven by broader responsible investment by institutional investors. The industry helps protect businesses and individuals from a range of physical climate-related perils, including wildfires, storms, and floods. Other types of insurance are also affected by climate-related transition risks including D&O insurance, health and life insurance, and motor insurance. 

However, as climate risks intensify, some might become uninsurable or require proactive measures to maintain insurability — for instance, homeowners may have to flood-proof their property to access flood insurance.

Supporting Renewable Energy and Sustainable Initiatives

Insurance also serves as a facilitator. It enables investment in renewable energy, insures electric vehicles and endorses sustainable building materials, to mention a few. These actions encourage the growth of environmental sustainability and contribute to mitigating greenhouse gas emissions. 

Insurers can also collaborate with the businesses they invest in to encourage better climate-related practices. This engagement drives innovation, while also inspiring responsible business behavior and catalyzing positive change across industries.

The Regulatory and Business Drivers Behind Responsible Investment 

Insurers pursuing responsible investment strategies can reap several business benefits and align themselves with regulatory requirements. For example, many insurers have increasing appetite for private debt and infrastructure debt investments, which, in addition to a good risk/return profile and fit for insurance liabilities, can align well with climate transition goals. In addition, embracing responsible investment enhances risk frameworks for insurers, mitigating climate-related risks and their associated financial and reputational consequences.

Growing regulatory measures further drive insurers to adopt responsible investment practices. The European Insurance and Occupational Pensions Authority, for example, recently published a consultation on the merits of increased capital charges for fossil fuel assets. While reporting frameworks like the Task Force on Climate-Related Financial Disclosures may sometimes be viewed as a mandatory box-ticking exercise, they do ultimately help improve existing risk management programs and support better decision making.

Overcoming Challenges

While there is widespread acknowledgement in the industry that limiting climate change is imperative, views vary on how investors should play a part. Limited priority given by boards and investment committees to responsible investment, along with a lack of stakeholder engagement, can impede progress. Additional hurdles include limited transparency and standardization of data and reporting, as well as resource constraints for assessing and implementing responsible investment.

These challenges may differ between regions, with insurers in some jurisdictions less keen or less able to adopt responsible investment practices given more general political and societal views, which can then also impact their subsidiaries in other countries. 

The latest report from the PRI3 highlights the continued progress of North American signatories in key areas, albeit with comparatively fewer public disclosures on responsible investment than their counterparts in Europe, Oceania, and Asia. Notably, Q1 2024 witnessed a surge in outflows from sustainable funds in the United States4, while European sustainable funds, commanding a significant share of global sustainable fund assets, have been on the rise.

Our institutional investor clients are proactively addressing these challenges through a comprehensive approach that includes:

  1. Tailored training sessions emphasizing the financial relevance of climate change risks and opportunities, emerging market trends, and best practices. This initiative is geared towards raising awareness at the board level and fostering stakeholder engagement.
  2. Reviewing governance structures, core beliefs, strategic objectives, and operational models to allocate dedicated resources towards prioritizing responsible practices throughout the organization.
  3. Collaboration with industry peers and participation in sector-wide initiatives to drive enhanced data quality, transparency, and standardization in reporting practices.

Actively implementing these measures helps to further embed responsible investment principles across the organization and drive positive impact within the investment community at large.

Nurturing a Sustainable Workforce

It’s no surprise that skills such as data analysis, financial modeling with ESG integration and risk assessment are becoming increasingly valuable in the industry. By nurturing these skills within their workforce, insurers can ensure they are not only well-equipped to identify and capitalize on relevant opportunities, but also manage potential risks and generate long-term value. 

In theory, embracing responsible practices and integrating them into investment decisions might also enable insurers to attract and retain top talent who are increasingly drawn to environmentally and socially responsible organizations. Motivated professionals who are passionate about making a positive impact on the environment and society bring fresh perspectives, innovation and expertise to the company, fostering a culture of sustainability.

Finding the Right Strategy

While approaches to responsible investment may vary among insurance companies, the goal remains consistent: 

  1. Incorporating climate-related factors into investment decisions across all asset classes.
  2. Actively engaging with the companies they invest in to encourage better climate-related practices, rather than simply divesting from more carbon-intensive companies.
  3. Considering broader measures that align with core business objectives and sustainability goals like water conservation, affordable housing and biodiversity.

As climate-related factors continue to influence investment decisions, it is important that insurers understand the evolving dynamics of the responsible investment landscape and its impact on their business, both now and in the future. No one-size-fits-all approach exists, but a crucial first step is to clearly articulate within the organization how key concepts, such as sustainability and responsible investment, are defined.

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By embracing responsible investment, insurers can not only mitigate climate-related risks and support renewable energy initiatives, but also seize long-term growth potential and commercial opportunities.

Craig Campbell
Senior Consultant

Overcoming challenges and finding the right strategy requires proactive engagement and a deep understanding of the evolving dynamics of responsible investment. With every investment decision, insurers have the chance to contribute to a more sustainable world, leaving a positive impact on businesses, individuals and the planet — and paving the way for a future that is both economically prosperous and environmentally responsible.

1 https://www.abi.org.uk/data-and-resources/tools-and-resources/regulation/insurers-as-investors/
2 https://insuranceeurope.eu/publications/2620/annual-report-2021-2022/download/Annual+Report 2021-2022.pdf
3 https://www.unpri.org/investment-tools/global-responsible-investment-trends-inside-pri-reporting-data/12222.article#storytext-end
4 https://www.reuters.com/sustainability/sustainable-finance-reporting/record-88-bln-pulled-us-sustainable-funds-q1-2024-04-25/

Aon’s Thought Leader
  • Craig Campbell
    Senior Consultant

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