What is the Net Zero Insurance Alliance and how did it materialize?
The Net Zero Insurance Alliance (NZIA) is a UN-backed initiative created in July 2021 at the G20 climate summit in Italy to help the insurance industry transition to a low-carbon economy. The NZIA is convened by the UN’s Environment Programme (UNEP)’s Principles for Sustainable Insurance (PSI). The PSI Initiative is the largest collaboration between the UN and the global insurance industry and serves as a framework to address ESG risks and opportunities.
Since its launch in 2012, more than 200 organizations worldwide have adopted the principles of the PSI Initiative. Signatories commit to implementing the four principles across their spheres of influence. At a high level, these principles include:
- Embed ESG issues into decision-making
- Work with clients and partners to raise awareness of ESG issues, manage risk, and develop solutions
- Work with governments, regulators, and other stakeholders to promote action on ESG issues
- Demonstrate accountability and transparency in regular public disclosures on progress in implementing these PSI principles
Who are the members of the NZIA?
The alliance is made up of nearly 30 leading insurers, representing over 8 trillion USD in assets under management, including its founding members: AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re, and Zurich Insurance Group.
As signatories, NZIA members must commit to transition their insurance and reinsurance underwriting portfolios to net zero emissions by 2050. The NZIA provides support to its members on their journey to net zero by engaging with governmental bodies and advocating for policies that aid the low-carbon transition. NZIA also helps its members improve knowledge sharing, set intermediate science-based targets, and report on their progress annually.
What role do insurers play in the net zero transition?
The insurance industry faces significant risks and opportunities of its own due to climate change and the global transition to a low-carbon economy. As with any company, insurers must reduce their emissions to meet global reduction demands and emerging regulations. However, the emissions from an insurer’s internal operations are a drop in the bucket compared to its insured and financed emissions from its investments, underwriting portfolio, and claims management activities (aka, Scope 3 financed emissions).
Insurers provide protection and assurance to businesses against economic losses. Insurers can significantly mitigate their climate risk by helping their customers and investments reduce theirs. That’s true for physical climate risks such as increasingly severe and frequent extreme weather events or sea level rise, as well as transition risks such as stranded assets, regulatory requirements forcing decarbonization, or decreased demand for certain products and services. The more insurers have to pay out in claims to their customers, the more their bottom line suffers. Moreover, premiums increase with increased claims, which can have ripple effects throughout the economy and reduce the viability of insurance as a strategy for addressing climate risks. On the other hand, the more insurers’ customers and investments reduce their emissions and build resilience against physical climate risks, the better insurers fare.
The Net Zero Insurance Alliance Commitment
As a signatory of the NZIA, members commit to net zero emissions by 2050 across their insurance and reinsurance underwriting portfolios, including:
- Establishing intermediate science-based targets every five years, starting within six months of joining the NZIA, and independently and publicly report progress against those targets on an annual basis
- Implementing underwriting criteria and guidelines for the most carbon intensive activities in its portfolios
- Engaging with clients on decarbonization strategies and net zero pathways
- Introducing new insurance and reinsurance products, solutions, and plans for low-emissions technologies and nature-based solutions
- Improving claims management
- Integrating climate and sustainability criteria into risk management frameworks for underwriting portfolios
- Advocating for science-based governmental policies to support a socially just net zero transition for all economic sectors
- Joining relevant initiatives such as the Net Zero Asset Owner Alliance
- Collaborating with insurance associations, regulators, policymakers, and intergovernmental organizations to promote the goals of the NZIA and advocate for consistent frameworks to support the net zero transition
- Engage with non-members in the insurance and financial services industries as well as academics and other non-governmental organizations on the goals of the NZIA
How can insurers reach net zero?
The first step in an insurer's journey to reach net zero is to measure the carbon emissions from its own operations, investment portfolio, and underwriting portfolio. The former is the easiest part. To measure emissions from its portfolios, an insurer needs to gather data from the companies in them, including assets held by policyholders - a difficult feat for most insurers to do accurately and regularly. However, with the right data management tools, insurers can start to baseline the companies or entire industries in their value chain and identify the largest sources of emissions. Then it's up to the insurer to decide whether to drop the biggest polluters from its portfolio or take steps to help them transition to net zero, such as by providing guidance and incentives in its underwriting or claims management to adopt low carbon technologies or processes.
Insurers can also use other tools to bolster their strategies. For example, scenario analysis can help to test the resilience of their strategies under different projected future climate scenarios. Climate trajectory modeling can help them to plan their decarbonization pathway and measure progress as they implement their plan. These tools can help them to understand the effects of net zero targets on their growth, for example, and make changes to their products and services that accelerate the transition. To lower emissions among its customers, some insurers have started to reward them with better protection and access to capital and lower premiums. This approach is not a charitable one. It’s based purely on economics and in an effort to fulfill their own net zero commitments.
Which tools are available to support NZIA members and non-members alike?
Persefoni’s Portfolio Analytics Suite, which includes seven new dashboards, as well as Portfolio Index Benchmarking and Climate Impact Benchmarking, provides users with deep carbon insights to integrate into their investment strategy and improve financed emissions calculations. Customers can visualize potential decarbonization pathways, conduct climate due diligence, model value at risk, compare estimates to actuals, construct low-carbon portfolios, and more.
With Persefoni’s Climate Impact Benchmarking module, users can see how portfolio companies’ emissions stack up against peers by extracting insights on their total footprint, scope breakdown, and emissions intensity. They can broaden the analysis to an industry level using the Portfolio Impact Benchmarking module to see how fund-by-fund carbon footprint compares to popular equity and fixed income indices like S&P 500, Russell 2000, and more.
If you would like to find out how the Persefoni platform can automate your alignment net zero, schedule a demo here.
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