Environmental, social, and governance (ESG) issues—also known as sustainability issues—are posing a shared risk to the insurance industry, business, government, and society at large, and are undermining sustainable development. Examples of ESG issues include climate change, increasing vulnerability to natural disasters, natural resource degradation, water scarcity, environmental pollution, lack of access to insurance, widening social inequality, violations of human rights and labour standards, ageing populations, emerging health risks, trust and reputation issues, corruption, and lack of accountability and transparency.
Insurance’s Triple Role
The insurance industry, a $5 trillion market in terms of world premium volume, represents more than 6% of global GDP, and has more than $30 trillion in global assets under management. The industry is uniquely positioned to promote sustainable development through its triple role as risk managers, risk carriers, and institutional investors.
As risk managers, insurers help communities understand, prevent and reduce risk through risk research and analytics, catastrophe risk models, and loss prevention measures. Insurers also advocate proper land-use planning, zoning and building codes, and promote disaster preparedness.
As risk carriers, insurers protect households and businesses by absorbing financial shocks due to natural hazards such as cyclones, floods, droughts, and earthquakes. They are also helping the transition to a low-carbon and resource-efficient economy through green insurance solutions such as insurance for renewable energy, green buildings and energy efficiency, and usage-based insurance (e.g. pay-as-you-drive insurance). Furthermore, insurance pricing provides risk signals and rewards risk reduction efforts.
Finally, insurers are major institutional investors. Insurance for and investments in renewable energy, green buildings, low-carbon transportation, sustainable agriculture, and climate-resilient infrastructure promote sustainable development.
The Principles for Sustainable Investment
Principle 1: We will embed in our decision-making environmental, social and governance issues relevant to our insurance business.
Principle 2: We will work together with our clients and business partners to raise awareness of environmental, social and governance issues, manage risk and develop solutions.
Principle 3: We will work together with governments, regulators and other key stakeholders to promote widespread action across society on environmental, social and governance issues.
Principle 4: We will demonstrate accountability and transparency in regularly disclosing publicly our progress in implementing the Principles.
UN Principles for Sustainable Insurance
From 2006-2012, the work of the UN Environment Programme Finance Initiative (UNEP FI) with the insurance industry on sustainability issues led to the development of the Principles for Sustainable Insurance (PSI).
Through the PSI, insurers have a shared view that the “world is facing increasing environmental, social, and governance (ESG) challenges” and that “ESG issues are increasingly influencing traditional risk factors and can have a significant impact on the industry’s viability. Therefore, a resilient insurance industry depends on holistic and far-sighted risk management in which ESG issues are considered.” These insurers have the common aspiration “that better management of ESG issues will strengthen the insurance industry’s contribution to building a resilient, inclusive and sustainable society.”
Endorsed by the UN Secretary-General and insurance CEOs worldwide, the principles were launched at the 2012 UN Conference on Sustainable Development in Rio de Janeiro (Rio+20). They serve as a global framework to address ESG risks and opportunities.
The principles are structured according to the spheres of influence of an insurance company, from core business strategies and operations (e.g. company strategy, risk management and underwriting, product development, sales and marketing, claims management, investment management), through to business partners (e.g. clients, agents, brokers, reinsurers, suppliers), governments, regulators, and other key stakeholders. Furthermore, the principles promote accountability and transparency. For example, each insurer that signs the PSI is required to publicly and annually disclose its progress in implementing the principles.
Since their launch in 2012, the principles quickly became part of the criteria of the Dow Jones Sustainability Indices, FTSE4Good, and Brazil’s BM&FBOVESPA Corporate Sustainability Index.
Turning the PSI into Practice
Many insurers are showing leadership and innovation in implementing the principles, in varying degrees and scales. For example, Allianz and Swiss Re’s respective sustainability risk frameworks seek to better manage ESG risks in insurance and investment transactions. Munich Re has developed an insurance underwriting tool to assess ESG risks in engineering projects. AXA has joined the African Risk Capacity, an insurance pool to protect African countries from extreme weather events.
AXA has also committed to divest from companies most exposed to coal-related activities, totalling €500 million, and to triple their green investment to over €3 billion by 2020. Similarly, Aviva has committed to invest over $3.8 billion in low-carbon infrastructure over the next five years. Allianz has announced that it will stop financing coal-based business models, saying it will no longer invest in companies that derive more than 30% of revenue from coal mining or generate over 30% of their energy from coal.
Beyond being a global framework to be implemented by insurers, the principles have led to the largest collaborative initiative between the UN and the insurance industry—the PSI Initiative. Today, nearly 100 insurance and stakeholder organisations worldwide have adopted the principles, including insurers representing more than 20% of world premium and $14 trillion in assets under management.
As a global initiative, the PSI Initiative has become a strong platform for thought leadership and collaboration. In the past decade, average economic losses from disasters were about $190 billion per year, while average insured losses were about $60 billion per year. This century, more than one million people have already lost their lives to disasters. In this context, IAG led the PSI Global Resilience Project, a multi-year collaborative initiative to help communities and governments develop effective approaches to reduce disaster risk and to drive greater investment in disaster risk reduction.
By 2030, 60% of the world’s population will be living in cities, which will be at the core of the climate conundrum. This is why AXA and the PSI Initiative produced the first global study of how cities and SMEs are building climate resilience, based on a survey of more than 40 city leaders and 1,100 SMEs. Meanwhile, Munich Re and the International Finance Corporation are leading a global project by the PSI Initiative and the World Bank to develop guiding sustainability principles for underwriting surety bonds and infrastructure projects.
On investment, Aviva engaged the PSI Initiative and other stakeholders in developing a roadmap for sustainable capital markets, and has put forward calls to action to mobilise the $300 trillion of capital in financial markets to help realise the UN Sustainable Development Goals.
In Brazil, the Brazilian Insurance Confederation (CNseg) and Brazilian insurers have produced sustainability goals for their entire insurance market based on the four Principles for Sustainable Insurance. In Africa, starting in 2016, Santam, the PSI Initiative, ICLEI—the global cities network, ClimateWise and partners are creating City Innovation Platforms for African infrastructure resilience, with Dar es Salaam as the pilot city. The PSI Initiative and ICLEI are also collaborating on how insurers and local governments can work together in building resilient and sustainable cities.
In China, with the PSI Secretariat as the insurance lead, the PSI Initiative contributed to ground-breaking policy initiatives to green China’s financial system led by the People’s Bank of China, the Development Research Center of the State Council, the UNEP Inquiry into the Design of a Sustainable Financial System, and the International Institute for Sustainable Development.
This year, the PSI Secretariat is continuing to support sustainable insurance policy initiatives, including insurance elements of the non-G20 developing countries work stream of the G20 Green Finance Study Group convened by China under its 2016 G20 presidency. In Italy, the PSI Initiative is playing an active role in the Italian National Dialogue on Sustainable Finance.
The Growing Relevance of Sustainability
Insurance regulation and supervision will be critical to guide actions on sustainable development. The key role of regulators is recognised in Principle 3 of the PSI: “We will work together with governments, regulators and other key stakeholders in promoting widespread action across society on environmental, social, and governance issues.” In this context, insurers have committed to work together with governments and regulators to, for example, “support prudential policy, regulatory and legal frameworks that enable risk reduction, innovation, and better management of ESG issues.”
Insurance regulators, such as those of California, Washington State, and the Philippines, have publicly showing their leadership and commitment to sustainable insurance aims by signing the PSI themselves.
Independently, insurance regulators have been taking action in response to sustainability challenges such as climate change adaptation and mitigation, disaster risk management, and financial inclusion. In the US, the US National Association of Insurance Commissioners (NAIC) has required insurers to disclose to regulators the financial risks they face from climate change since 2009, with several states implementing mandatory disclosure.
At state level, the California Insurance Commissioner is implementing a comprehensive climate action plan spanning underwriting, green insurance products, investment, land-use planning, and building codes. Meanwhile, the Washington State Insurance Commissioner is encouraging insurers and key stakeholders to become involved in efforts on land-use regulation and building code requirements in order to prevent or reduce problems due to climate change.
In the UK, in 2015, the Bank of England’s Prudential Regulation Authority (PRA) completed the most in-depth assessment done to date of the risk of climate change to insurers and policyholders, across physical, transition, and liability risks.
In the Philippines, the Philippine Insurance Commissioner has championed financial inclusion through micro-insurance, which has led to the Philippines having the highest micro-insurance coverage ratio in the Asia-Pacific. Current efforts include developing disaster insurance mechanisms across the individual, local, and national levels.
The Sustainable Insurance Policy Forum
From 2014-15, the PSI Initiative and the UNEP Inquiry into the Design of a Sustainable Financial System (the UNEP Inquiry) carried out a first-ever global consultation on how insurance policy and regulation could better support sustainable development. After convening a multi-stakeholder global roundtable with Swiss Re in May 2015, the PSI and the UNEP Inquiry launched in June 2015 the global report Insurance 2030: Harnessing Insurance for Sustainable Development, which recommended, among others, the creation of a Sustainable Insurance Policy Forum (SIPF) to scale up policy progress through enhanced collaboration across jurisdictions.
The UK PRA’s climate change adaptation report in September 2015 also concluded that a “network for insurance regulators and associations interested in sustainable insurance policies, guidelines, and practices” may be worthy of further consideration. Furthermore, the report highlighted the importance of leadership and insurers’ role in driving a wider societal response to climate change by, for example, “becoming a signatory to the Principles for Sustainable Insurance.”
The PSI Initiative and the UNEP Inquiry are now working with insurance regulators in creating the SIPF, which would provide a practical arena for regulators to share experience and practices and to develop effective approaches.
The PSI Initiative contributed to major UN global policy frameworks for sustainable development that were agreed in 2015—namely, the Sendai Framework for Disaster Risk Reduction, the UN Sustainable Development Goals, and the Paris Agreement on Climate Change.
In March 2015, the PSI Initiative launched the United for Disaster Resilience Statement, a global commitment by insurers to work with governments and other stakeholders in implementing the Sendai Framework for Disaster Risk Reduction.
At the Climate Finance Day in May 2015, the PSI Initiative launched an online global platform for insurers to exercise leadership through voluntary commitments that support the aims of the 3rd UN World Conference on Disaster Risk Reduction, 3rd International Conference on Financing for Development, 2015 UN Sustainable Development Summit, and 2015 UN Climate Change Conference (COP21).
Furthermore, the PSI Initiative is contributing to a range of United Nations-backed initiatives and forums. Examples include the UN Secretary-General’s Climate Resilience Initiative (A2R), the Paris Pledge for Action, the work of the UN Framework Convention on Climate Change’s (UNFCCC) Standing Committee on Finance (SCF), the Warsaw International Mechanism for Loss and Damage, the UN Development Programme-backed Climate Vulnerable Forum (CVF), and the Vulnerable Twenty Group of Ministers of Finance (V20).
Finally, the PSI Initiative is exploring the development of a set of Insurance Development Goals (IDGs) to help realise the 2030 UN Sustainable Development Goals (SDGs). This agenda-setting idea was recognised by the UN Global Compact and KPMG in their 2015 report SDG Industry Matrix: Financial Services, and by The Economist in their Insurance Summit 2016: Guardians of the Future.
In just over three years, the PSI Initiative has shown how the UN and insurers can work together in building a risk-aware, resilient, and sustainable society. In the words of UN Secretary-General Ban Ki-moon, “The Principles for Sustainable Insurance provide a global roadmap to develop and expand the innovative risk management and insurance solutions that we need to promote renewable energy, clean water, food security, sustainable cities, and disaster-resilient communities. With world premium volume [of more than $5 trillion] and global assets under management [of more than $30 trillion], insurers that embed sustainability in their business operations can catalyse the kinds of financial and investment flows and long-term perspectives needed for sustainable development.” i
To learn more about the PSI Initiative, please visit: www.unepfi.org/psi
The United Nations Environment Programme (UNEP) is the leading global environmental authority that sets the global environmental agenda, promotes the coherent implementation of the environmental dimension of sustainable development within the United Nations system and serves as an authoritative advocate for the global environment.
Endorsed by the UN Secretary-General and insurance industry CEOs worldwide, the Principles for Sustainable Insurance (PSI) serve as a global framework for the insurance industry to address environmental, social and governance risks and opportunities. Developed by the UN Environment Programme Finance Initiative (UNEP FI), the Principles have led to the largest collaborative initiative between the United Nations and the insurance industry—the PSI Initiative. As of March 2016, nearly 100 organisations have adopted the Principles, including insurers representing more than 20% of world premium volume and USD 14 trillion in assets under management. The Principles are part of the insurance industry criteria of the Dow Jones Sustainability Indices, FTSE4Good, and Brazil’s BM&FBOVESPA Corporate Sustainability Index.
The vision of the PSI Initiative is of a risk aware world, where the insurance industry is trusted and plays its full role in enabling a healthy, safe, resilient and sustainable society. Its purpose is to better understand, prevent and reduce environmental, social and governance risks, and better manage opportunities to provide quality and reliable risk protection.
About the Author
Butch Bacani’s role is focused on developing and executing the global strategy and work programme of the UNEP FI Principles for Sustainable Insurance (PSI)—a global framework to address environmental, social and governance risks and opportunities. Endorsed by the UN Secretary-General and insurance industry CEOs, the PSI was launched at the 2012 UN Conference on Sustainable Development (Rio+20). The Principles have led to the largest collaborative initiative between the United Nations and the insurance industry—the PSI Initiative. The vision of the PSI Initiative is of a risk-aware world, where the insurance industry is trusted and plays its full role in enabling a healthy, safe, resilient and sustainable society.
Butch is leading PSI activities supporting key UN global policy frameworks that were agreed in 2015—the UN Sustainable Development Goals, the Paris Agreement on Climate Change, and the Sendai Framework for Disaster Risk Reduction—and is championing the idea of producing “Insurance Development Goals”. Together with the UNEP Inquiry into the Design of a Sustainable Financial System and insurance regulators, Butch is leading the creation of a Sustainable Insurance Policy Forum. From 2014-15, he led a global consultation on insurance policy and regulation and industry practices, which delivered a 2030 global roadmap to harness the full potential of the insurance industry for sustainable development. He is a member of the expert group that developed the UN Secretary-General’s Climate Resilience Initiative (A2R). In 2014, he became the insurance lead of the expert group working with the Chinese government on policy initiatives to green China’s financial system and, in 2016, became part of the expert group for the Italian National Dialogue on Sustainable Finance.
Butch advises and contributes to various initiatives and forums relevant to sustainable insurance. Examples include the Paris Pledge for Action, the Vulnerable Twenty Group of Ministers of Finance (V20), the Agricultural and Climate Risk Insurance+ Initiative of GIZ, and the Environmental Stress Testing Pilot Project of GIZ and the Natural Capital Declaration. At the UNEP Finance Initiative (UNEP FI), Butch led the global research, consultation and drafting process that produced the PSI. From 2006-10, he led both UNEP FI’s insurance and investment programmes, including its activities with the UN-supported Principles for Responsible Investment Initiative. Butch has authored pioneering studies on global sustainability issues for insurers, the first global sustainability survey of the insurance industry, global research and insurance industry statements on climate change and disaster risk management, and a legal roadmap on fiduciary duty and responsible investment. Prior to the UN, Butch was based in Asia as the Head of Reinsurance of the Pioneer Group where he spent over a decade working with leading insurers and reinsurers worldwide