Inspire and be inspired: insurers and the global effort towards net zero

The global push towards net zero has wide-ranging implications for the insurance industry. The behaviours, strategies and expectations of our stakeholders are changing rapidly. The shift in just seven years, since the 2015 Paris Agreement, has been meaningful. However, we now have only eight years left to cut global emissions by 50 percent, so the pace of change has to accelerate further.

I won’t talk about the why: this should no longer be a discussion point. But how can insurers help? What can we do to support this colossal and complicated project?

Insurers can and should

Fidelis recently published details of its updated underwriting guidelines, including tighter restrictions around fossil fuels. The adoption of these restrictions represents a step in our journey towards net zero: many more steps are needed, but we know we have to start somewhere. The Climate Clock is ticking and we cannot wait until we think we have all the answers.

One of the general principles of our approach to sustainability is that we take real, tangible actions to achieve long-term goals—rather than simply making broad commitments. We have therefore signed up to the Poseidon Principles for Marine Insurance as well as joining the Net Zero Insurance Alliance (NZIA), both of which require concrete actions and commitments, and we are taking steps to embed decarbonisation into all aspects of our business.

We firmly believe that the insurance sector can—and should—play a part in delivering the net zero agenda. It is our problem as much as anyone else’s. What is more, we cannot simply look at our operations and investments when thinking about net zero. We are providers of capital and facilitators of economic activity, just like other financial institutions: we therefore have an important role in enabling certain activities and discouraging others. We need to be looking at various ways in which we can use underwriting as a tool to help drive decarbonisation of the economy.

“The transition argument is too often used as an excuse.”

Carrot and stick

There are at least three different ways in which we can do this, and all of them should be pursued in parallel. We can actively support activities or technologies which are climate positive, whether forest conservation and renewable energy or hydrogen and carbon capture. We can challenge the climate strategies of our insureds, making capacity, pricing or T&Cs conditional on transition towards more climate-friendly business models. And finally, we can refuse to support certain activities which we believe are simply not appropriate, like burning coal for energy in wealthy countries, or by certain companies which have no intention of becoming more environmentally sustainable.

In discussions about net zero there is a lot of emphasis on supporting transition and not simply excluding certain activities—which is the insurance equivalent of divestment. We absolutely agree with this in the sense that we believe we should exert our leverage to change and improve behaviour, to help companies move from less to more sustainable behaviours. Pure exclusions, like divestment, only shift the problem to someone else: they don’t necessarily help the economy to change, unless the same exclusionary policies were to be adopted universally. Even then, it would not necessarily be desirable: existing oil and gas companies, or other corporates in heavy industries, have a huge amount of capital, infrastructure and expertise which need to be harnessed in support of a greener economy. We therefore have no intention of dropping entire sectors of the economy, and we will be realistic about the timelines and trajectories we ask of insureds.

At the same time, the transition argument is too often used as an excuse. As an industry we have to be prepared to walk away from business, and there are certain activities or certain corporate strategies that should not be acceptable. There are oil and gas companies out there which are ‘proudly hydrocarbon’, which talk about drilling as many new wells as possible for as long as possible, without any recognition of the fact that this business model simply has to change. Or companies which have actually shifted focus to concentrate on tar sands, which are incredibly emission-intensive and energy-inefficient (not to mention the environmental damage they cause), and where new investment should not be facilitated.

There are some clear positive actions among carbon-intensive companies, like robust targets to reduce absolute emissions, investment in high quality offsets and carbon sequestration, shifting investment spend towards renewables for new projects—and on the other hand some clearly concerning actions, like new coal or tar sands investments. As insurers, we have to define a robust and consistent way to evaluate these various actions. We must differentiate between companies we will continue to support and work with, accompanying them on their journey towards net zero—and those which we will walk away from because we feel they do not have any genuine commitment to transitioning their business.

“A clear imperative is to develop a broad palette of products which help with both climate change mitigation and adaptation.”

No conflict with social outcomes

It is often pointed out that the ‘E’ in ESG may clash with the ‘S’, leading to difficult trade-offs. This can also be true when it comes to fighting climate change. However, it need not be the case. While there are no perfect or easy solutions, we can focus on encouraging those which have the most balanced outcome.

One very topical example of apparent conflict relates to the fallout from the ongoing Russia-Ukraine war, which seemingly pits net zero ambitions against cost-of-living concerns. But there are good and bad responses to the current crisis, and all of these responses have lasting consequences: no new energy infrastructure will be abandoned again in a couple of years, so the choices we make are not just ‘for now’. They have to make sense for the long term. This is therefore the perfect opportunity to make a forceful push for renewables, to invest all new funds in sustainable technologies, to incentivise consumers and corporates to make the switch. Renewables are also a good way to improve energy security and moderate dependence on fossil fuel suppliers. It is disappointing to see the current situation being used instead as an excuse to prolong the operation of coal plants and dramatically ramp up natural gas capacity.

Another topic that comes up frequently—and rightly so—is around a ‘just transition’. Again, we are absolutely in agreement with the notion that transition has to take place in a way which ensures positive social outcomes and does not have a disproportionately negative impact on disadvantaged countries or communities. For Fidelis, social issues are just as important as environmental ones. But again, there are good and bad ways to go about this. Condoning coal power indefinitely and without limitation for developing countries, for instance, is a bad approach. There still has to be a real sense of urgency around the transition, and any new investments should focus as much as possible on clean, sustainable types of energy. Poor communities benefit more from these than from cheap but dirty fuels in any case if we also consider the health implications.

“It is much more important to start moving in the right direction rather than agonising over fine detail.”

Prime time for innovation

This comes back to another way in which insurance can help. We talk a lot about protection gaps and the fact that many of those most impacted by climate change are in deprived countries or regions. Our sector can absolutely help improve resilience in such communities, not just by extending coverage but increasingly through innovative products—whether microinsurance products or sovereign non-payment products or products supporting disaster relief.

More broadly, insurers can support net zero through products that enable technologies such as hydrogen or carbon capture, and solutions related to the carbon markets. A clear imperative for the industry, alongside being ready to say ‘no’, is therefore to develop a broad palette of products which help with both climate change mitigation and adaptation. In a way, this is the more challenging element because it requires hard work, creativity, time, finding the right broker and corporate partners, but perhaps most importantly, getting underwriters comfortable with new risks and emerging technologies. We are only starting these discussions and there is a lot more to do, but this should increasingly be what we spend our time on.

Looking to COP27

Like other companies working towards net zero, Fidelis is awaiting the outcome of COP27 with great interest. Previous COPs have varied in terms of their degree of impact: how will this one measure up?

The Egyptian hosts have stated their desire for this to be an ‘implementation COP’, focusing on immediate actions and accelerating delivery against existing pledges. Sameh Shoukry, Egypt’s Minister of Foreign Affairs and COP27 President-Designate, has pointed out that “there can be no room for delay in the fulfilment of climate pledges or backtracking on hard earned gains in the global fight against climate change”. This is absolutely key. The latest NDCs still fall short of what is needed: at the time of COP26, national targets were aligned with a 2.4oC warming scenario by 2100, which is woefully inadequate. It seems there has been minimal progress since then, as just 23 countries met the COP26-agreed deadline of September 23 for making their climate commitments more stringent.

But what is even more concerning is the gap between targets and action. It is undeniable that all major economies are lagging relative to where they should be. The UK, for example, is not currently on track according to the UK Committee on Climate Change. The UKCCC noted earlier this year that the lack of clear implementation strategy threatens 2035 targets, and the subsequent branding of the government’s net zero strategy as ‘unlawful’ was a landmark decision. So while the UK screens relatively better than most in terms of its ambitions—it is one of very few countries whose targets are ‘Almost sufficient’, according to the Climate Action Tracker—there is a lot more action needed to meet these ambitions.

COP27 therefore has to involve strong agreement that the climate change agenda is still a top priority and there must be stronger commitment to meeting existing targets. The emphasis has to be on practical outcomes. This mirrors the situation at a corporate level, where it is much more important to start moving in the right direction rather than agonising over fine detail while the clock continues to tick.

Immediate and longer-term priorities

Fidelis will continue to roll out its net zero action plan. Between now and the middle of 2023, most of our efforts will be focused on coming up with a robust carbon footprint calculation and then our first five-year decarbonisation plan, in line with our NZIA commitments. The first exercise should be relatively straightforward—even if the sourcing of reliable emissions data is a challenge—but the real complexity will be around target setting. We will need to factor in the sensitivities discussed earlier, and find a balance between being realistic about the pace of change on the one hand and setting ambitious targets on the other hand. Many of our peers will be doing similar things next year, and it is my sincere hope that 12 months from now there will be a number of robust decarbonisation plans in existence across our industry.

Beyond this, we intend to work hard on new products and finding ways to deploy our capacity in climate-positive ways. We will work with clients as well as brokers to make this a reality, complementing ongoing work to ensure we progressively reduce the carbon footprint of our portfolio. Needless to say, we will not lose focus on our operations and investments (we will for instance refine our footprint calculations and continue to seek out high quality offset projects), as all areas of our business need to be aligned with net zero ambitions. We have recently joined ClimateWise so we plan to transparently disclose progress on our various initiatives—this is a very important aspect of any net zero journey. It plays an essential role in building credibility as well as enabling engagement with external stakeholders—it helps to ensure that we do not simply look inwards but also outwards.

To the same end, we seek to engage with others in the insurance industry in whatever ways are appropriate, to share experiences, to inspire and be inspired. This is not a project in which we can be successful on our own.