Large insurers are increasingly committing to reach net zero carbon emissions across their insurance and investment portfolios by mid-century, says Moody’s in a new report.
They plan to achieve their decarbonisation targets through a combination of engagement (encouraging customers and investee companies to reduce their emissions), investment in climate solutions, and exclusion or divestment (selling carbon intensive assets and withdrawing insurance from carbon intensive customers) where necessary.
According to Moody’s, effective net zero plans will help insurers manage their exposure to carbon transition risk, which could erode the value of their carbon intensive investment assets and reduce their premium income. Financed emissions via the investment portfolio account for most of the life sector’s exposure, while insured emissions are also a factor for non-life insurers. The most credible plans include measurable interim targets and are based on robust, transparent frameworks.
According to the agency carbon transition creates risk for insurers: “Insurers are exposed to carbon transition risk through the investments they hold on balance sheet, and through the premium revenue they generate from clients in carbon intensive sectors. Investment risk is greater for life insurers because of their higher asset leverage. European insurers tend to have less investment exposure to carbon intensive sectors than their North American and Asian peers.”
Net zero plans help insurers manage transition risk; while net zero objectives require considerable organisational focus and investment in measuring carbon transition risk – t his puts insurers in a better position to manage it. The most credible plans are based on robust and transparent frameworks, include measurable interim targets, and cover the full range of insurers’ emissions.
However, Moody’s suggests, insurers’ net zero strategies vary:
“Insurers provide varying levels of detail how they plan to eliminate emissions, and on their interim targets. More European insurers than Asian or North American peers have joined net zero alliances, which tend to have common, clearly defined goals and implementation plans. Most non-alliance members have less well-developed plans to manage this risk, and appear to be following a more flexible approach.”