Insurers are rapidly assuming the role as the key drivers in developing a more sustainable global economy.

A new report from Fitch Ratings released today said the industry can leverage its role as investors and underwriters to enhance the move to greater sustainability.

“As investors, insurers are demanding more ESG transparency from investee companies and are encouraging them to adopt strategies that support the net-zero carbon targets defined in the Paris Agreement,” said Fitch. “A long-term investment focus means insurers are particularly well placed to channel investment into infrastructure projects, notably in the area of renewable energy.

“Insurers can design products to reduce some of the risks inherent in infrastructure projects and therefore increase their attraction to investors. The ability to help channel investment into sustainable projects is viewed as a sizeable growth opportunity for the insurance sector by our panellists.”

The report sets out the conclusion from the company’s webinar on the move towards a green economy held last month.

“The insurance sector is well placed to act as an enabler of environmental policies in the move towards a low-carbon economy. The sector is used to assessing long-term risks and it can help redirect finance towards innovative infrastructure sectors in need of long-term funding.” Janine Dow, Sustainable Finance, Fitch Ratings.

The report said the industry’s drivers of ESG investment strategies are finely balanced between internal convictions and external pressures. Internal ethical and moral judgements that formed the starting points used to inform ESG investment policies for some insurers have largely been superseded by technical, evidence-based research to support performance targets.

As data improves and records lengthen, particularly in areas of innovation such as renewable energy companies, buy-side interest in ESG metrics is increasing.

“External pressures are equally important, the report explained. “An ESG investment framework is essential for bringing in new investment flow and preventing outflows.

“Competitive pressures are mounting, especially as retail investors are increasingly being asked about their ethical investment preferences and as awareness of allocation options increases. Investors that become involved in ESG earlier will be in a better position as they will have a longer proven history of involvement. This is particularly important as the move towards mainstream sustainable investment strategies is global and accelerating.”

“The insurance sector is well placed to enable environmental policies in the move towards a low-carbon economy, according to our panellists,” added Fitch.  “Life insurers, who manage large pools of capital and are used to making long-term investments to match the long-term duration of their liabilities, can help redirect finance towards innovative infrastructure sectors in need of long-term funding.

“In addition to the industry acting as an investor, it can also assess the new risks associated with innovative infrastructure projects – such as offshore floating solar farms and broader renewable energy solutions – and, by structuring new insurance offerings, can boost the attraction of infrastructure as an asset class for investors.

“Insurers are experienced at raising debt in the capital markets and investors understand their stable, well-diversified business models. As such, they are well placed to issue green and sustainable bonds and tap into new investor pools. These instruments also provide a good opportunity for insurers to communicate their green and sustainable investment strategies and explain their role in contributing to transitioning to a greener economy.”

Fitch explained insurers have highlighted the need to manage social risks as they implement investment and exclusion screening policies.

Many have already excluded investment in new coal mines and oil sands extraction and have committed to reducing investments in the fossil fuel sector.

“Halting, reducing, or significantly adjusting pricing on insurance cover for companies operating in countries whose economies are heavily commodities-dependent can bring significant social risks,” cautioned the report. “In these cases, timetables for introducing adjustments can stretch out to 20 or 30 years so as to allow economies to transition towards more sustainable models.”

The report said the industry’s drivers of ESG investment strategies are finely balanced between internal convictions and external pressures. Internal ethical and moral judgements that formed the starting points used to inform ESG investment policies for some insurers have largely been superseded by technical, evidence-based research to support performance targets.