Illuminating Climate

Illuminating Climate

ESG and credit insurance: Time for the market to take ownership

The insurance industry can do more to help the world meet its ambitions around delivering superior environmental, social and governance impact, say Aon’s Madeleine Whiteley, Nicolas Carreño and Eran Charit
Madeleine Whiteley
Madeleine Whiteley
Senior Client Manager, Structured and Capital Solutions, Aon
Nicolas Carreño
Nicolas Carreño
Chief Operating Officer EMEA, Credit Solutions, Aon
Eran Charit
Eran Charit
Head of Structured and Capital Solutions EMEA, Aon

The 2021 United Nations Climate Change Conference (COP26) will take place in Glasgow, UK in November. It will represent the latest move by world leaders towards meeting the targets of the 2015 Paris Agreement where a commitment was made to limit the increase in the global average temperature to less than two degrees Celsius above pre-industrial levels.

Given that the OECD has estimated that $6.3 trillion of infrastructure is needed every year to meet development goals – rising to $6.9 trillion if the investment is to be compatible with the goals of the Paris Agreement – the private sector’s role in green finance will be critical. For the credit insurance sector, there is a clear need as well as a clear opportunity for the industry to help by driving the greening of its products and services.

Pockets of progress

The good news is there are pockets of progress in the credit insurance market, such as the recent launch of a green credit insurance product which seeks to invest any premiums back into green investments. A Managing General Agent (MGA) is also imminent which will purely support green project finance transactions.

We will also see credit insurers start to bring environmental, social, and governance (ESG) KPIs to the forefront of their country and buyer ratings. Euler Hermes announced last year it had downgraded 25 countries amid the integration of additional ESG metrics into its country ratings [in January 2020]. In addition, a number of other initiatives are currently being run or at least investigated in the market to shift the dial on delivering a positive ESG impact: from withdrawing cover for industries like coal, to reducing premiums for businesses which can fulfil a set level of ESG requirements. And there is the option to load the insurance premium on businesses that do not meet green criteria; as well as a commitment to supporting a specific number of green projects every year.

These are all positive steps but insurers investigating such options are still outliers in a market which tends to be more reactive to change and there is an absence of proactive and meaningful product strategies.

Why? The pressure isn’t there yet and that’s frustrating. We have spoken to a range of credit insurers who very broadly admit to not taking ESG criteria into account as part of their underwriting. Underwriters’ targets are not aligned to ESG strategies, and management has not yet put the agenda at the heart of their decision making; unlike say the banking sector, where green credentials are beginning to be built into pricing models.

Pressure for change will build

Pressure of course will build on the insurance sector. It could come from shareholder activists who want to see change. A recent study in the Financial Times revealed that half of all FTSE100 companies now link executives’ pay to ESG factors, with shareholder demands listed as one of the reasons for the change. Or pressure could come from governments and regulators who will want the industry to play its part in meeting national targets for the transition to the zero-carbon economy and commitments to the 2015 Paris Agreement.

Pressure is also likely to come from employees. We are seeing younger talent lobbying to change underwriting criteria to reflect the need to support companies and projects with a more favourable approach to ESG factors. In the war for talent, presenting positive credentials could be the critical difference. The need to attract young talent was a key factor cited in Statoil’s name change to Equinor in 2018, for example, and a shift of its focus away from fossil fuels to renewables.

A broker’s role

What about our role as brokers? How can we help encourage the shift to a greener model? We could focus on clients who have more ambitious ESG goals, or support businesses working to improve their ESG performance. But a broker’s role needs to go further and involve working with underwriters to set up insurance facilities that reward clients for their ESG credentials.

In the credit world, can we work with insurers to help energy clients, for example, take responsibility for legacy fossil fuel assets and move towards a greener future? Take the example of a major oil company decommissioning an oil rig. At some point it will have to spend millions cleaning it up or sell it. Governments are slowly pushing these companies to recognise these large liabilities on their balance sheet, which perhaps encourages a company to sell rather than retire a polluting asset as they shift their focus to renewables.

Is there something we can do to help that process using credit insurance solutions or other products, which means the oil company can begin to decommission its carbon intensive operations without tying up the working capital that can instead be put towards investment in its green, renewable energy portfolio?

Trillions of dollars needed

Realistically, we’re at the beginning of a conversation. But there is a growing realisation that the insurance industry will need to do much more if it’s to play its part in helping the world meet its Paris climate obligations. Trillions of dollars of investment are needed in areas like renewable energy development and insurance can help the private sector pivot towards this demand. We shouldn’t wait for regulation or governments to mandate change, or investors to force change, we can drive the green agenda right now.

We expect the market to significantly increase its ESG focus and activity in 2021 and going forward with some emerging innovation and new client solution opportunities, which all require close review and coordination.

This article was originally published by Aon

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