Throughout history, insurers have been pivotal in driving social change, enabling human progress, innovation, and prosperity. From seatbelts to vaccines and fire-retardant materials, insurers have fostered numerous innovations. Nowadays, they face a new monumental challenge: climate change. 2024 has been another record loss year for insurers driven by natural catastrophes linked to climate change. Insurers are hence seeking greener pastures. If done right, aiding businesses in their transformation to reduce greenhouse gas emissions becomes a positive for insurers. They can be facilitators of the transition to a carbon-neutral future by exerting influence across the wide variety of industries they finance.
There is an opportunity for insurers to safeguard their top-line and bottom-line while supporting customers on their net zero journeys. In Underwriting, that minimizes risk exposure and scope for regulatory fines by proactively responding to changes, and clients who effectively embark on the green transition are expected to bring higher sales in the mid to long term. In Investments, the case is even better understood: 93% of investors say that climate issues are most likely to affect the performance of investments over the next two to five years. Non-transitioning companies or those who start transitioning too late are in danger of losing an investment grade credit rating, while the outperformers – what we call ‘green stars’ are expected to benefit from green technologies shift in a Paris-agreement-aligned world scenario.
A new tool for profitable portfolio decarbonization
Insurers need to be able to translate their investee and clients’ emission reduction measures into financial implications for appropriate risk calculations, to decarbonize profitably on their own end.
As we at Accenture are committed to fostering net zero business practices we have introduced the GreenFInT (Green Financial Institution Tool ), also known as the Profitable Portfolio Decarbonization Tool. Comparing sample client portfolio dynamics up until 2050 for high carbon intensive sectors, it shows ‘green stars’ might outperform ‘climate laggards’ by 30-40 percentage points. The true value of the tool lies in familiarizing insurance managers across investment, risk and pricing with setting assumptions for different world views, from a ‘hot world’ scenario to reaching the Paris alignment.
Allow me to delve into the tool in greater detail. The GreenFInT tool caters to both the emissions measurement and reporting use cases (e.g., ESRS E1 quantitative KPIs for CSRD) as well as to business value cases with regards to decarbonization. The tool applies climate scenarios (e.g., 1.5°C, 2.4°C) to portfolio companies’ technology mix, depending on their Net Zero pledges and transition plans. Differences in technology mix, pledges, and plans translate into divergent profitability curves via required capital investments and differences in operational costs.
‘Green stars’ win out in the long term
For illustration, an insurer’s ‘green star’ client from the power generation sector with a SBTi verified Net Zero target by 2040 has and will have a larger share in renewables than a client classified as ‘laggard’. With its proactive transition towards net zero, the ‘green star’ client has initial high capital costs to finance the build out of installed capacities from renewable energy sources to meet its milestones while electricity prices are relatively high – outlining a business opportunity for insurers as the client is in need of financing and insuring of the renewables built out. In comparison, a ‘laggard’ company had no and will not have capital investments beyond usual replacement and maintenance costs of its power plants. On the other hand, renewables have much lower operational cost compared to power generated from nuclear energy and natural gas. Thus, the ‘green star’ that has invested in renewables in a timely fashion will benefit from lower operational costs while the ‘laggard’ will have higher operational costs from traditional energy sources.
Let’s take an exemplary insurance portfolio with 40 large company clients from four high-intensity sectors, namely power generation, steel, real estate, and automotive, focused within Europe. In a 1.5°C scenario, the capital need for the net zero transition of these companies amounts to approximately 650bn USD 2023-2050 – according to the GreenFInT modelling. While in the mid-term up until 2030, the EBT margin of ‘laggards’ outperform ‘green stars’ by approximately 6 percentage points, in the long-term, 2023-2050, ‘green stars’ outperform ‘laggards’ by 30-40 percentage points (see graph below).
This forward-looking approach – leveraging scientific sector carbon budgets vs. traditional forecasts based on historical values – enables insurers to integrate long-term scenarios (up to 2050) into their current considerations. This is a most important step towards breaking the ‘tragedy of the horizon’. GreenFInT makes it possible to identify insurers’ investees and clients with trustworthy net zero commitments as the business case assessment can reveal who may not be able to afford their net zero commitments. Building a trusted relationship with these companies as insurer or investor today, is key for a profitable decarbonization. Insights gained through GreenFInT can be helpful to prioritize clients to engage with and a grounded conversation opener to better understand the clients’ transition plans.
Beyond a net zero business case analysis, GreenFInT also covers the accounting of Scope 3 Category 15 emissions in absolute terms and physical intensities as well as target setting and a ‘What-If’ capability, enabling insurers to simulate effects on their carbon footprint with adjustments to their portfolio.
The time to act is now
Insurance has consistently demonstrated resilience in the face of numerous challenges, and the current push towards decarbonization is no different. By embracing the transition to net zero, insurers can not only safeguard their profitability but also play a pivotal role in fostering a sustainable future. The integration of science-based sustainability targets into underwriting and investment practices will enable insurers to drive significant change across various industries. As regulatory pressures and public expectations continue to rise, insurers must act decisively to avoid the risks of inaction and greenwashing. The tools and strategies outlined provide a clear pathway for insurers to achieve profitable portfolio decarbonization, ensuring long-term growth and trust in a rapidly evolving landscape. The time to act is now, and the opportunities for those who lead the charge are immense. For further discussion on how to implement these strategies in your enterprise, please get in touch.
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