Throughout history, insurance companies have played a key role in driving social change and promoting human progress, innovation and prosperity. From seat belts to vaccines and flame-retardant materials, insurance companies have fostered innovations. Now they face a huge new challenge: climate change. Insurers will suffer record losses in 2024 due to the impact of climate change-related natural disasters. As a result, insurance companies are seeking more favorable terms. If done right, helping businesses transform to reduce greenhouse gas emissions will have a positive impact on insurance companies. They can become facilitators of the transition to a carbon-neutral future by exerting influence across the various industries they fund.
Insurers have the opportunity to protect their top lines and profits while supporting customers on their net zero journey. On the underwriting side, clients who effectively undertake green transitions by proactively responding to changes and minimizing risk exposure and the scope for regulatory fines are expected to generate higher sales in the medium to long term. In “Investment” this situation is better understood: 93% of investors Think climate issues are most likely to impact investment performance over the next two to five years. Companies that do not transform or start the transition too late are in danger of losing their investment-grade credit ratings, while high-performing companies (which we call “green stars”) are expected to benefit from the green technology shift in a Paris Agreement-aligned world scenario.
New tools for decarbonizing profitable portfolios
Insurers need to be able to translate the emissions reductions of their investees and customers into financial impacts to make appropriate risk calculations and thus decarbonize profitably for themselves.
As Accenture works to advance net-zero business practices, we launch Greenfield (Green Financial Institutions Instrument), also known as the Profitable Portfolio Decarbonization Instrument. Comparing sample client portfolio dynamics to 2050 in highly carbon-intensive industries, the results show that Green Stars may outperform Climate Laggards by 30-40 percentage points. The real value of this tool is in familiarizing insurance managers with investment, risk and pricing knowledge and setting assumptions for different worldviews, from a “hot world” scenario to the Paris Consensus.
Please allow me to examine this tool in more detail. The GreenFInT tool addresses both emissions measurement and reporting use cases (e.g., CSRD’s ESRS E1 quantitative KPI) and business value cases for decarbonization. The tool applies climate scenarios (e.g., 1.5°C, 2.4°C) to portfolio companies’ technology portfolios based on their net zero commitments and transition plans. Differences in technology mix, commitments and plans translate into different profitability curves through differences in required capital investment and operating costs.
In the long run, Green Star will win
For example, an insurance company’s “green star” customers in the power generation sector who have met the SBTi-verified net zero target by 2040 will have a greater share of the renewable energy sector than customers classified as “laggards”. As it aggressively transitions to net-zero, Green Star customers have high initial capital costs to fund the construction of renewable energy capacity to meet their milestones, while electricity prices are relatively high, creating opportunities for insurers as the customer needs to finance and insure the renewable energy being built. In contrast, “laggard” companies have not and will not make capital investments beyond the usual replacement and maintenance costs of their power plants. On the other hand, the operating costs of renewable energy are much lower compared to nuclear and natural gas generation. Therefore, “green stars” who invest in renewable energy in a timely manner will benefit from lower operating costs, while “laggards” will face higher operating costs due to traditional energy sources.
Let’s take a typical insurance portfolio as an example, which has 40 large corporate clients from four high-intensity industries, namely power generation, steel, real estate and automotive, mainly concentrated in Europe. According to the GreenFInT model, the capital needs for these companies to achieve net zero transition between 2023 and 2050 are approximately US$650 billion under a 1.5°C scenario. In the medium term, until 2030, “Laggards” will outperform “Green Stars” by about 6 percentage points in EBT margins, while in the longer term, from 2023 to 2050, “Green Stars” will outperform “Laggards” by 30-40 percentage points (see chart below).
This forward-looking approach – using scientific sector carbon budgets alongside traditional forecasts based on historical values – enables insurers to factor long-term scenarios (out to 2050) into current considerations. This is the most important step to break the “tragedy on the horizon”. GreenFINT can identify insurers’ investments and customers with trustworthy net zero commitments, as business case assessments can reveal who may not be able to afford net zero commitments. Today, building trusting relationships with these companies (either as insurers or investors) is key to decarbonizing profitably. Insights gained through GreenFInT help prioritize customer engagement and help build solid conversation starters to better understand customers’ transition plans.
In addition to net zero business case analysis, GreenFInT also covers accounting for the absolute value and physical intensity of Scope 3 Category 15 emissions, as well as target setting and ‘what if’ functionality, allowing insurers to simulate the impact on their carbon footprint by adjusting their portfolios.
Now is the time to take action
The insurance industry has always shown resilience in the face of numerous challenges, and current efforts to drive decarbonization are no exception. By transitioning to net zero, insurers can not only safeguard their profitability but also play a key role in promoting a sustainable future. Integrating science-based SDGs into underwriting and investment practices will enable insurers to drive significant change across industries. As regulatory pressure 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 path for insurers to profitably decarbonize their portfolios, ensuring long-term growth and trust in a rapidly evolving environment. Now is the time to take action, and the opportunities are huge for those who lead the charge. For further discussion on how to implement these strategies in your business, please Get in touch.
