In 2020, Aberdeen Standard Investments commissioned in-depth research across Europe’s five largest insurance markets: the UK, Germany, France, Italy and Switzerland. Our aim was to investigate how insurance investors are responding to environmental, social and governance (ESG) challenges. The full report covers current practice, future objectives and the views of key decision-makers at 60 European insurance companies.

When measuring impact and identifying sustainability objectives, insurance companies increasingly refer to the UN Sustainable Development Goals (SDGs). The 17 SDGs cover all of the most pressing issues of the next decade, and each has specific targets to be achieved by 2030.

The SDGs to have gathered the most investor interest are those related to climate change. Of all portfolio-wide ESG objectives, 96% are climate-change-related.

Clear objectives on climate

Climate targets fall into two main categories: those that seek to reduce exposure to climate risk and those that seek to contribute to the energy transition.

Carbon-footprint reduction is a common objective, with 30% of our survey respondents targeting a reduction in their portfolios’ CO2 emissions. Some insurance companies have gone further, with 13% announcing net-zero objectives to be achieved by either 2030 or 2050.

Another approach is the gradual ramp-up of investment in green assets. 58% of respondents plan to increase their allocations to green assets, usually through green bonds and private assets (e.g. real estate and infrastructure).

As many insurance companies invest passively, these changes entail a shift away from traditional benchmarks. Already, 39% plan to move towards ESG or climate benchmarks for their passive equity allocations.

Together, these objectives align with an increase in temperature of no more than 2°C. Although this target is still rare among insurance companies, 35% say that their environmental efforts should bring them closer to this goal.

The role of regulation

To a large extent, the emphasis insurers place on climate change is the result of regulation. Indeed, most regulations linked to sustainable investment specifically focus on climate change.

In France, for example, Article 173 of the country’s energy-transition law requires institutional investors to disclose their sustainable-investment practices. One French property and casualty (P&C) insurer put it bluntly: “Everything points towards climate change. Every year, we have to disclose what we do to help fight climate change. No one is asking us what we are doing to address inequality or hunger. Regulation sets priorities”.

In France, for example, Article 173 of the country’s energy-transition law requires institutional investors to disclose their sustainable-investment practices. One French property and casualty (P&C) insurer put it bluntly: “Everything points towards climate change. Every year, we have to disclose what we do to help fight climate change. No one is asking us what we are doing to address inequality or hunger. Regulation sets priorities”.

The European Union’s sustainable finance regulations also have climate change at their core. The EU taxonomy for sustainable activities is specifically designed to categorise activities around six pillars, all related to environmental objectives: climate-change mitigation; climate-change adaptation; protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.

This taxonomy allows investors to identify ‘green’ assets by setting performance thresholds for economic activities that make a substantive contribution to one of the six environmental objectives, do no significant harm to the other five and meet minimum safeguards. This allows investors to define clear targets without fear of greenwashing accusations.

Regulatory authorities play an equally important role in helping insurance companies to address issues that could pose a material risk to their solvency. Here again, the focus is on climate change. In the UK, the UK Prudential Regulation Authority’s supervisory statement SS319 was introduced in April 2019 to fight climate-change risks. In France, meanwhile, the Prudential Supervision and Resolution Authority (ACPR) has sought to support banks and insurance companies to manage climate-related risks.

The merits of measurability

“We can only manage what we can measure,” one Swiss life insurer told us. An additional explanation for the insurance industry’s focus on climate change is the measurability of climate risks. Insurance companies benefit from a range of tools specifically designed to assess climate change and its impacts. For example, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are widely recognised as a comprehensive framework for measuring and tackling climate-related risks.

Respondents say that such initiatives have allowed them to delve deeper into climate-risk analyses, which they have not been able to do with other ESG factors.

This deeper analysis has mainly taken the form of scenario analyses, which allow assessments of physical and transition risks. The most recently available tools, climate stress tests, aim to speak directly to the core of the insurance business: risk and solvency.

Scenario analysis

The use of climate-change scenarios in active risk management has gained significant momentum among insurance companies. Encouraged by regulation, 57% of respondents have already started to assess the potential impacts of climate change on their investment portfolios according to different scenarios. To conduct these analyses, insurance companies increasingly make use of the TCFD’s recommendations.

Physical-risk analysis

Physical risks result from shifts in climate patterns. These risks may have financial implications for organisations directly, through damage to assets, or indirectly, through supply-chain disruptions. Already, 60% of insurance companies have begun to assess their exposure to such risks. As physical-risk analysis requires detailed information on companies that may not be publicly available, insurers have either partnered with third-party data providers or focused on directly held private assets.

Transition-risk analysis

The transition to a lower-carbon economy may entail significant business risks for companies and their investors. Some 56% of insurance companies have conducted transition-risk analyses. These require more qualitative inputs than physical-risk assessments. To assess their exposure, most insurers use proxies such as carbon footprints. These are seen as just a first step as they do not capture the full breadth of transition risks.

Climate stress tests

Climate stress tests seek to project the impact on an insurance company’s financial returns and solvency in different climate-change scenarios. Of our respondents, 9% have begun to conduct these stress tests, and 52% aim to conduct them in future. Respondents point to two main limitations: investment horizon and disclosure. “I do not understand how I can project my portfolio to 2050 when I am mostly exposed to short-term assets,” said one UK life insurer.

The innovations that insurers are using to tackle climate change are encouraging. It is clear that more is required, however, both on climate change and in other aspects of ESG. Further innovation will be needed as insurers continue their sustainable investment journey.

You can read our full insurance-survey report here.

In 2020, Aberdeen Standard Investments commissioned in-depth research across Europe’s five largest insurance markets: the UK, Germany, France, Italy and Switzerland. Our aim was to investigate how insurance investors are responding to environmental, social and governance (ESG) challenges. The full report covers current practice, future objectives and the views of key decision-makers at 60 European insurance companies.

When measuring impact and identifying sustainability objectives, insurance companies increasingly refer to the UN Sustainable Development Goals (SDGs). The 17 SDGs cover all of the most pressing issues of the next decade, and each has specific targets to be achieved by 2030.

The SDGs to have gathered the most investor interest are those related to climate change. Of all portfolio-wide ESG objectives, 96% are climate-change-related.

Clear objectives on climate

Climate targets fall into two main categories: those that seek to reduce exposure to climate risk and those that seek to contribute to the energy transition.

Carbon-footprint reduction is a common objective, with 30% of our survey respondents targeting a reduction in their portfolios’ CO2 emissions. Some insurance companies have gone further, with 13% announcing net-zero objectives to be achieved by either 2030 or 2050.

Another approach is the gradual ramp-up of investment in green assets. 58% of respondents plan to increase their allocations to green assets, usually through green bonds and private assets (e.g. real estate and infrastructure).

As many insurance companies invest passively, these changes entail a shift away from traditional benchmarks. Already, 39% plan to move towards ESG or climate benchmarks for their passive equity allocations.

Together, these objectives align with an increase in temperature of no more than 2°C. Although this target is still rare among insurance companies, 35% say that their environmental efforts should bring them closer to this goal.

The role of regulation

To a large extent, the emphasis insurers place on climate change is the result of regulation. Indeed, most regulations linked to sustainable investment specifically focus on climate change.

In France, for example, Article 173 of the country’s energy-transition law requires institutional investors to disclose their sustainable-investment practices. One French property and casualty (P&C) insurer put it bluntly: “Everything points towards climate change. Every year, we have to disclose what we do to help fight climate change. No one is asking us what we are doing to address inequality or hunger. Regulation sets priorities”.

In France, for example, Article 173 of the country’s energy-transition law requires institutional investors to disclose their sustainable-investment practices. One French property and casualty (P&C) insurer put it bluntly: “Everything points towards climate change. Every year, we have to disclose what we do to help fight climate change. No one is asking us what we are doing to address inequality or hunger. Regulation sets priorities”.

The European Union’s sustainable finance regulations also have climate change at their core. The EU taxonomy for sustainable activities is specifically designed to categorise activities around six pillars, all related to environmental objectives: climate-change mitigation; climate-change adaptation; protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.

This taxonomy allows investors to identify ‘green’ assets by setting performance thresholds for economic activities that make a substantive contribution to one of the six environmental objectives, do no significant harm to the other five and meet minimum safeguards. This allows investors to define clear targets without fear of greenwashing accusations.

Regulatory authorities play an equally important role in helping insurance companies to address issues that could pose a material risk to their solvency. Here again, the focus is on climate change. In the UK, the UK Prudential Regulation Authority’s supervisory statement SS319 was introduced in April 2019 to fight climate-change risks. In France, meanwhile, the Prudential Supervision and Resolution Authority (ACPR) has sought to support banks and insurance companies to manage climate-related risks.

The merits of measurability

“We can only manage what we can measure,” one Swiss life insurer told us. An additional explanation for the insurance industry’s focus on climate change is the measurability of climate risks. Insurance companies benefit from a range of tools specifically designed to assess climate change and its impacts. For example, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are widely recognised as a comprehensive framework for measuring and tackling climate-related risks.

Respondents say that such initiatives have allowed them to delve deeper into climate-risk analyses, which they have not been able to do with other ESG factors.

This deeper analysis has mainly taken the form of scenario analyses, which allow assessments of physical and transition risks. The most recently available tools, climate stress tests, aim to speak directly to the core of the insurance business: risk and solvency.

Scenario analysis

The use of climate-change scenarios in active risk management has gained significant momentum among insurance companies. Encouraged by regulation, 57% of respondents have already started to assess the potential impacts of climate change on their investment portfolios according to different scenarios. To conduct these analyses, insurance companies increasingly make use of the TCFD’s recommendations.

Physical-risk analysis

Physical risks result from shifts in climate patterns. These risks may have financial implications for organisations directly, through damage to assets, or indirectly, through supply-chain disruptions. Already, 60% of insurance companies have begun to assess their exposure to such risks. As physical-risk analysis requires detailed information on companies that may not be publicly available, insurers have either partnered with third-party data providers or focused on directly held private assets.

Transition-risk analysis

The transition to a lower-carbon economy may entail significant business risks for companies and their investors. Some 56% of insurance companies have conducted transition-risk analyses. These require more qualitative inputs than physical-risk assessments. To assess their exposure, most insurers use proxies such as carbon footprints. These are seen as just a first step as they do not capture the full breadth of transition risks.

Climate stress tests

Climate stress tests seek to project the impact on an insurance company’s financial returns and solvency in different climate-change scenarios. Of our respondents, 9% have begun to conduct these stress tests, and 52% aim to conduct them in future. Respondents point to two main limitations: investment horizon and disclosure. “I do not understand how I can project my portfolio to 2050 when I am mostly exposed to short-term assets,” said one UK life insurer.

The innovations that insurers are using to tackle climate change are encouraging. It is clear that more is required, however, both on climate change and in other aspects of ESG. Further innovation will be needed as insurers continue their sustainable investment journey.

You can read our full insurance-survey report here.