Could insurers reap a “green valuation premium” by exiting from the oil and gas industry? That’s the suggestion from a Société Générale research report, which outlined the opportunities for insurers to benefit from, while also contributing to, efforts to reach net-zero goals.
The report, published in July, makes the case that lessons can be taken from when European insurers backed away from providing coverage to coal companies. Most European re/insurers now won’t insure new coal projects and have a roadmap to fully exit from the industry, with the result that now coal companies face difficulties in securing coverage.
The report states that exiting coal, along with other ESG efforts, can add billions to insurers’ valuations, with a green valuation premium of up to 6%.
Société Générale describes withdrawing from the oil and gas sector as the “next step” in the insurance industry meeting climate-based objectives.
We certainly expect to see early signs of valuation uplift amongst sustainability-leading firms.
This opinion is echoed by Graham Handy, managing director, Global Insurance Services at FTI Consulting. But he notes that excluding only oil and gas companies may not be enough to warrant a green valuation premium for insurers.
“We certainly expect to see early signs of valuation uplift amongst sustainability-leading firms,” he says, but stepping away from oil and gas is “only one component of a wider comprehensive sustainability strategy, and so if done in isolation is unlikely to result in this premium.”
Europe Leads the Way
Currently, European (re)insurers have been more aggressive than their US or Asian counterparts in helping combat climate change, with the Société Générale report describing Axa, Swiss Re and Allianz as among the industry leaders. Conversely, Liberty Mutual, Chubb and Ping An are laggards when it comes to moving away from coal, and more broadly in enacting climate-based initiatives, the Société Générale report states.
Peter Bosshard, global coordinator, for Insurer Our Future, a US-based campaign holding the U.S. insurance industry accountable for its role in the climate crisis, says the investment market is right to expect European (re)insurers to be at the fore of climate-based movements and to subsequently benefit from the valuation premium.
“Given their risk awareness and privileged access to climate science, it is no surprise that European insurance companies have warned about climate risks for many decades and have started to align their underwriting with their public positions. The real surprise is that many insurers in the US and East Asia continue to undermine international climate agreements by underwriting new coal, oil and gas projects,” says Bosshard.
Climate Science Driving Accountability
More broadly across the energy sector, the shift towards renewables, even in rhetoric only, is seemingly enough to appease investors’ appetites. On 4 August 2020 , BP’s share price rose 6.5% immediately after revealing its energy transition strategy amid one of its worst quarterly performances on record.
But in the wake of the Deepwater Horizon oil spill, and the subsequent $65 billion compensation package, accountability for ecological disasters and the climate crisis has been growing.
All the while, insurers are footing the bill for increasingly costly extreme weather events. Heavy rains across Europe in the summer of 2021 may incur a potential €9 billion loss for insurers, according to Aon, with trend analysis showing that extreme weather events are becoming more severe globally. The World Weather Attribution initiative pinned the flooding directly to climate change.
By ending cover for coal, oil and gas companies, insurers can avoid holding the bag for the future massive payouts that these companies may need to make.
Bosshard says that as attribution and climate science improves, the chances that courts will hold fossil fuel companies liable for consequential climate disasters are increasing, as evidenced by the landmark case between a Dutch court and Shell, which will see the oil giant slash its carbon emissions to 2019 levels by 2030.
“By ending cover for coal, oil and gas companies, insurers can avoid holding the bag for the future massive payouts that these companies may need to make. More generally, many investors see bold climate action as a proxy for smart, forward-looking management and are prepared to pay a premium for the stock of climate leaders,” Bosshard said.
Concentrated Coverage
The Société Générale report describes how the provision of insurance to the oil and gas sector is highly concentrated.
According to Insure Our Future, about ten insurers cover approximately 70% of the market with the biggest being AIG, Travelers, Zurich and Lloyd’s.
With most of the coverage coming from US insurers, the report states that any broad-based actions are not going to be immediate.
Yet the high concentration presents an opportunity for the sector, as a small number of focused initiatives by a limited number of players could have a major impact.
The Société Générale report adds that it would only take a small number of actors to initiate meaningful change by: “refusing to insure new areas, such as oil/tar sands, oil shale and Arctic drilling.”
Further, the report suggests that the lost income would not be too great. Premiums from insuring new oil and gas projects amounted to approximately $1.7 billion in 2018, the Société Générale report states, which is just 0.1% of all property and casualty premiums.
Pushing for Change
With the relatively concentrated number of oil and gas insurers, broader efforts are needed to facilitate a shift away from carbon-intensive industries, according to the Association of British Insurers, while fossil-fuel producers still need cover.
“Carbon intensive activities will require careful management and insurance may still be needed to ensure responsible cover is in place, not least for the protection of employees or local residents through public or employers’ liability insurance,” says an ABI spokesperson.
“Ultimately, this is an issue which can only be tackled jointly between networks of local and national policymakers and civil society, which is why our industry is also committed to working collaboratively to achieve the scale of change that is needed.”
Yet Bosshard says that regulators should “take the threat of a financial meltdown due to unmanageable climate change seriously and push insurers to phase out their support for fossil fuels.”
Likewise, insurance professionals and customers should “vote with their feet and their pocketbooks when they have the choice between climate leaders and laggards in the sector,” he adds.
The issue of what ESG responsibilities insurers owe is developing rapidly. While the potential for (re)insurers and investors alike to capitalise on valuation premiums is providing an economic precedent to accelerate a transition away from coal, oil and gas, striking a balance between existing obligations and a managed withdrawal from carbon intensive industries is paramount for environmentally conscious (re)insurers.
