Not All Insurers Are Created Equal

Insurers are well-positioned to act as climate ambassadors. They specialize in assessing and managing risk and effectively can support their clients in mitigating risks from floods, rising temperatures, heavy rains and storms. As the insurance business model returns profits with better risk prevention, it can contribute to safer communities. This is why priorities of insurers are now shifting.

• Over the past years, insurers have been busy decarbonizing their own operations, investments, portfolios, and value chain.
• Now, the expectation is for them to assist clients in transitioning to net-zero: insurers' priorities are shifting from decarbonization to supporting clients on their paths to net-zero.
• While insurers face significant challenges in decarbonizing "Scope 3", there is a slow and sluggish adoption by customers of "greener options" in sales and servicing. In fact, there is no "green customer", he or she does not exist. Companies have been overestimating customers’ appetite for sustainable products. Many of these offerings do not sell.
• This is the reason why broader and bolder action on climate change is necessary, both within the core of the insurance (underwriting, pricing, claims) and in broader measures by governments to incentivize the financing of a sustainable economy. The "big shift" lies in governments and businesses working more closely together to help bridge the funding gap.

A big job to be done: Insurers decarbonizing Scope 3 emissions

Compared to other industries, the insurance industry has relatively low scope 1 and 2 carbon emissions from its own operations, accounting for only 10% to 25% of total emissions.

• Insurers' efforts to transition to greener buildings and vehicle fleetshave been largely successful. Waste management has been optimized, energy and water consumption has been improved - in particular during and post pandemic.
• The focus of insurers has now shifted towards addressing scope 3 emissions. Scope 3 emissions are the hardest to decarbonize. They account for 75% to 90% of the industry's total emissions.
• These emissions occur upstream and downstream in the supply chain, involving external vendors, suppliers, and partners. For instance, repairing a damaged windshield instead of replacing it with a new one might save about €1,200, on average, and reduce emissions by 99 percent. These are concrete and (still) rare examples where profit and planet are aligned.
• This is why, in Scope 3, insurers have developed a series of targeted approaches to transform their claims processes to reduce emissions. Some create significant savings, some are close to cost-neutral, and others require significant investments (Exhibit).

As a result, insurers face significant challenges in decarbonizing "Scope 3". There is a slow and sluggish adoption by customers of "greener options" in claims and it take considerable conviction and efforts to encourage suppliers to commit to their own ambitious net-zero targets.

There is no "green customer" - he or she does not exist. It takes considerable conviction and efforts to encourage customers and suppliers to commit to greener choices. European clients are simply not (yet) prepared to embark on a transition to greener choices and ESG-driven transformation roadmaps.

Next mission to accomplish: Help clients to decarbonize

European insurers, including AXA, are actively addressing Scope 3 emissions by integrating sustainability goals into their underwriting practices and involving customers in their climate transition.

AXA recently launched PlanNet (Plan to Net Zero), a global expert network focused on transitioning underwriting practices. In addition to managing their own asset portfolios, AXA is committed to guiding the liability side of their balance sheet toward decarbonization goals.

While some AXA markets started to invest in carbon capture technologies, another key leverage for insurers is underwriting sectors heavily affected by climate transition, given their close connection to the insurers' core business model. Across AXA underwriting teams are working on integrating ESG scoring in the local underwriting processes to actively drive and support sustainable businesses practises.

While regulators are increasingly expecting the insurance industry to play a role in financing the transition to net-zero emissions by 2050, we anticipate that annual public climate finance flows will cover only 25% of the funding requirement.

Significant efforts facing significant obstacles: There is no "green customer"

However, these efforts face significant obstacles

• Industry Collaboration: For example, large global insurers participating in the Net Zero Insurance Alliance (NZIA) have encountered resistance from US lawyers citing potential legal concerns over collective decarbonization agendas, leading to withdrawals from the alliance due to perceived antitrust risks.
• Activist Intervention: There has been a surge in activist activities, prompting some companies to retract from bold sustainability initiatives. Whether partnering with industry groups or proceeding individually, companies are facing intense scrutiny regarding their climate and social equity efforts. Sustainability has become such a contentious topic, that companies start "green hushing" their commitments and initiatives. Not surprisingly, we saw numerous sustainability discussions over the past months causing fatigue, overshadowed by green washing and social washing concerns.
• Customer Cooperation: European retail or SME clients are simply not (yet) prepared to embark on a transition to greener choices and ESG-driven transformation roadmaps. Our customer research across European SMEs indicates that, unless external pressures force action, the reputational and competitive factors are not significant enough to incentivize these clients to start the sustainability journey. With any purchase decision, consumers are first trying to get a specific job done. Only after they find something that will help them do that job — and only if sustainability is important to them — will they look an social or environmental advantage in addition. While this may not apply to large multinational firms and tier 1 brokers, it remains a challenge for the majority of clients captured by the large multi-line P&C books of European insurers.

Sustainability has become such a contentious topic, that companies start "green hushing" their commitments and initiatives. Not surprisingly, we saw numerous sustainability discussions over the past months causing fatigue, overshadowed by green washing and social washing concerns.

The conclusion drawn from this suggests that

• Discussions on Scope 3 in insurance only scratch the surface of insurers' role in combating climate change. It is crucial to establish a realistic view of insurers' climate impact and what they can and cannot achieve. A pragmatic approach to climate transition involves expediting the financing of sustainable business models.
• Governments and businesses need to work closer together to create robust public-private partnerships to help close the funding gap. While regulators are increasingly expecting the insurance industry to play a role in financing the transition to net-zero emissions by 2050, we anticipate that annual public climate finance flows will cover only 25% of the funding requirement. The finance sectors including insurers will need to mobilize private finance flows of at least US$3.75 trillion to cover the 75% gap. This is why bolder action and a more pragmatic approach to financing a sustainable economy by governments is required.

Instead broadening commitments on climate action, bolder measures by government to incentivize the financing a sustainable economy are required. Governments and businesses need to work closer together to help close the funding gap.

Mirjam Bamberger is member of the Management Committee of AXA's European Markets & Health. Prior to this she has been she has been?CEO of AXA Luxembourg and CEO of AXA Wealth Europe and served in various roles as a board member of AXA Switzerland. Mirjam spent over 20 years living and working in the US and UK, China, Latin America and Europe across financial services and high tech industries. She holds an Executive MBA with honors from IMD Lausanne, a master’s degree from the University of Cologne and diplomas from University St. Gallen/Stanford, Cornell, DUW Berlin and ICMA. She d is a certified director of the Swiss Board School holding NED positions across Europe.