In recent months, there has been much discussion about the role of investors and the financial community in combating – or encouraging – climate change. However, one critical component of the global financial infrastructure has largely gone unnoticed: the insurance sector.
Insurance has a low profile despite its critical role in enabling projects to move forward; if you can’t get insurance, it’s often impossible to get finance.
“Many people around the world have endured a summer from hell, experiencing droughts, floods, and heatwaves.” “The insurance industry is in a good position to put an end to this,” says Peter Bosshard, global coordinator of the Insure Our Future campaign, which has just released its annual scorecard on insurers’ fossil fuel exclusion policies.
“The fossil fuel industry’s Achilles’ heel is insurance.” “Without it, no new fossil fuel projects will be developed, and many existing operations will be forced to close,” says Bosshard.
In the run-up to COP27, insurers appear to be the financial services sector driving meaningful action, as banks seek to refine their commitments as members of the Glasgow Financial Alliance for Net Zero (GFANZ) and Race to Zero coalitions.
The number of insurers refusing to cover coal projects has steadily increased, particularly in the reinsurance sector, where 62% of companies have coal exclusion policies, and for many others, coal projects are simply outside their area of expertise.
Reinsurance participation is critical because there are still a number of smaller insurers – some Lloyd’s of London brokers and firms from heavy coal users such as Vietnam and Indonesia – that would insure coal projects. That becomes much more difficult without reinsurance. “Outside of China, new coal power plants have become practically uninsurable,” says Bosshard.
Through the claims they must pay out following extreme weather events, insurers are far more directly exposed to the effects of climate change than banks or investors, and they have been warning of the risks for more than a half-century. Despite progress on coal, there was little momentum on oil and gas until recently.
“Although the science is clear that we need to transition away from oil and gas as well as coal,” Brossard explains, “oil – particularly gas – has retained a social license that coal no longer has.” There has been less pressure on companies to abandon oil and gas, which also provide much larger revenue streams than coal. But that pressure is increasing, and there are recent signs that it is having an effect.
Munich Re, the world’s largest reinsurer, has announced that it will no longer insure oil and gas projects, following in the footsteps of Swiss Re, Hannover Re, and Allianz. It will no longer cover new projects by April of next year, and by 2025, it will require oil and gas companies with the highest relative and absolute emissions to provide “a credible commitment to net-zero greenhouse gas emissions by 2050, including corresponding short- and mid-term milestones.”
Lloyds Banking Group (no relation to Lloyd’s of London, the insurance market) has become the first UK bank to announce that it will no longer directly fund oil and gas companies unless they have “viable projects into renewable energies and transition technologies” and credible net zero transition plans in place.
Pressure will mount on the remaining UK banks to follow suit. The Make My Money Matter initiative is planning to launch a campaign urging the Big Five UK high street banks – HSBC, Barclays, Santander, Natwest, and Lloyds – to stop financing fossil fuel expansion. According to Lloyds, there is now a clear direction of travel for this.
Meanwhile, Axis Capital became the first North American reinsurer to declare that it will not fund energy, mining, or other projects that do not have the support of local indigenous communities. Many communities claim that their voices are ignored when new projects are planned, despite the fact that the United Nations has acknowledged that developers must obtain the free, prior, and informed consent (FPIC) of impacted communities.
Axis has joined Swiss Re and Allianz in recognizing the value of FPIC. Following protests against projects such as the Trans Mountain oil pipeline in Canada and the Dakota Access pipeline in the United States, support for FPIC is increasingly seen as a material business issue.
And this may be why insurers are becoming more hesitant to fund oil and gas projects – the business arguments are becoming more compelling. Societe Generale added a “green premium” to insurer valuations in order to reflect the company’s efforts to exit coal insurance. It stated that leaving the oil and gas industry was “the next major ‘green’ goal for the sector and is already in their sights.” We believe momentum is building in this area.”
According to SocGen, most of the major European insurers and reinsurers will not insure new coal projects and have a clear roadmap to completely exit coal. “As a result, coal companies are finding it more difficult and expensive to obtain insurance, with many facing rate increases of up to 40%.”
“We believe that as insurers begin to reduce insurance coverage for the oil and gas industry, they will have the same impact on coal that they are having on coal.”
Insurance may be unseen, but it is a critical component of the low-carbon transition. And, while they can wield significant power through their vast investment portfolios, their greatest influence may come from the projects they fund.