Facts and fig­ures on sus­tain­abil­i­ty in the in­sur­ance in­dus­try

This Sustainability Report allows for the first time general statements to be made on sustainability for the member companies of the Swiss Insurance Association. It covers three areas of the insurance industry: investment, operational ecology and underwriting.

As far as investment and operational ecology are concerned, the SIA used questionnaires to collect data from its member companies. The responses are self-declarations made by the member companies. This data enables quantitative statements to be made on the sustainably managed assets and the CO₂ figures of the member companies.

• The data was collected from mid-December 2019 to mid-January 2020. The reference date is 31 December 2019.
• Participation was voluntary.
• Of the 76 member companies, 32 companies (which manage 94 per cent of investments made in the private insurance industry) took part in the survey.
• Data is not communicated on individual companies¹⁾.

The market coverage of the participating companies allows statements to be made about the insurance industry as a whole. The results based on the data supplied are supplemented by qualitative statements on the efforts made by the industry.

No quantitative data was collected for the section on underwriting. In this respect, the performance of and measures taken by individual insurers serve as a basis for qualitative information on the insurance industry. This information is based largely on the sustainability reports and announcements published by the member companies. Specific case studies illustrate how certain aspects are implemented.

Other activities
This report focuses on the activities described above. Member companies are also committed to the greater social and ecological good in other ways, using corporate foundations and sponsorship as outlets for their commitment to sustainable projects. Insurers offer their employees good working conditions and opportunities for further training, and actively promote their social and political commitment. Another topic important to the SIA is not included in the report: retirement provision. The SIA believes that providing for young and old is also part of sustainability. The risk that future generations will be left with more debt than benefits is considerable. This is why the SIA is committed to structuring pension provision in such a way that it too deserves the label of sustainability.

Channelling capital into sustainable investment is a measure that can be implemented directly by insurers. As a result, the large global insurance groups in particular had started to manage their investments with due regard to sustainability, or realigning their portfolios as a whole, before 2019. In some areas, such as real estate, insurers have been placing particular focus on sustainability aspects in their investments for some time now.

In the autumn of 2018, the member companies of the SIA affirmed their commitment to taking ESG criteria into account when managing their own investments. ESG stands for Environmental, Social and Governance and refers to responsibility for the environment, social issues and corporate governance. A commitment to ESG means taking into account environmental and social issues and ensuring sound corporate governance. For the first time, the SIA has used a survey to collect data from its member companies on management of capital flows. A uniform data collection process is hindered by the lack of internationally or nationally valid or recognised guidelines used by all insurers across the board. As a result, the SIA based its analysis on the criteria used as standard practice in the market for sustainable investment.

In total, 32 member companies – and all large and medium-sized member companies – took part in the SIA survey.
The reporting companies manage 94 per cent of investment made by the private insurance industry. ESG criteria are included in the investment process for 86 per cent of this investment. The following figures were achieved in the main asset classes listed below:

• Real estate (90 per cent of the investment volume of the participating companies)
• Fixed income securities (86 per cent)
• Shares (82 per cent)
• Alternative investments (56 per cent) ²⁾

It is important to note that regulatory requirements for investments made by insurers are extremely restrictive, particularly for investment in infrastructure. Direct investment in facilities that produce renewable energy, for example, cannot be counted towards tied assets. This means that many insurers are severely restricted with regard to alternative investments, despite the fact that the industry is very interested in long-term and sustainable investments such as these in general.

The survey shows that the majority of participating insurers take sustainability criteria into account when deciding where to place capital. Other smaller insurance companies that are not yet able to report any figures for 2019 are in the process of reviewing their strategic position and focus on corporate responsibility. The SIA supports the transfer of knowledge in this area within its member companies.

Of the 32 member companies participating in the survey, 25 applied ESG criteria to the investment decisions they made in 2019. The insurance companies use these criteria to arrive at an overall impression when making an investment decision. Exclusion criteria can be applied to all three aspects – environment, social and governance: If any of these criteria are breached, the decision is made not to invest. These criteria are set individually by the companies concerned.

There is a consistent focus on ecological responsibility (E – environmental): Climate (change) and (renewable) energy are central topics for all those companies that apply ESG criteria. Various insurers focus on investment to prevent environmental disasters and in the field of water management.
One widespread exclusion criterion relates to electricity supply companies at which the proportion of electricity generation attributable to coal (energy mix) exceeds a defined level (e.g. 30 per cent), or and mining companies in the coal mining sector.

Social responsibility is a slightly less firm feature of the ESG criteria applied in 2019, although the majority of companies that apply ESG criteria also take these criteria into account. The exclusion criteria focus primarily on human rights issues or, for example, internationally prohibited weapons. Other focal areas for individual companies include employment rights, health, food safety and vocational training (in that order).

Those insurers that look at social as well as ecological criteria focus on corporate governance. Some insurers also include diversity and a corruption ranking in their criteria.

The SIA member companies were surveyed on thematic heavyweights in their sustainable investments. One or more companies mentioned the following topics to which they attach particular emphasis:

• Impact investing
• Investment in sustainable infrastructure (renewable energy production, green buildings, social infrastructure)
• Sustainability bonds (green bonds, social bonds, sustainability bonds)

Impact investing means companies try to influence the strategy of the companies in which they invest as shareholders. Research shows that this strategy is capable of achieving more than simply avoiding investment in certain industries. Investment in sustainable infrastructure is a way of contributing to the transformation of energy supply or building stock towards a sustainable and low carbon future. The various sustainability bonds vary slightly in their focus depending on their structure. Some companies focus more on socially equitable production methods, while others pay more attention to climate-friendly companies.

Various global, national and regional organisations are dedicated to the promotion of sustainability, although their roots and motivations vary considerably. Dialogue via sustainability networks and the adoption of certain standards allow insurance companies to better understand the requirements and expectations – for example, environmental or social issues – and also to react more quickly to emerging challenges and changes.

Primarily, the larger Swiss insurers are involved in these organisations through membership and/or active mandates.

A non-exhaustive list includes:

International initiatives

• UNEP FI UN Environment Programme Finance Initiative, www.unepfi.org
• Net-Zero Asset Owner Alliance, www.unepfi.org/net-zero-alliance
• UN Global Compact, www.unglobalcompact.org
• Institutional Investor Group on Climate Change IIGCC, www.iigcc.org
• International Corporate Governance Network ICGN, www.icgn.org
• Forum Nachhaltige Geldanlagen FNG, www.forum-ng.org
• PRI Principles for Responsible Investment, www.unpri.org

National initiatives

• Swiss Sustainable Finance SSF, www.sustainablefinance.ch
• CEO4climate, https://ceo4climate.ch
• Swiss Association for Responsible Investments SVVK, www.svvk-asir.ch

Promotion of standards and transparency

• TCFD Task Force on Climate Related Financial Disclosure, www.fsb-tcfd.org
• GRESB, https://gresb.com
• International Corporate Governance ICGN, www.icgn.org
• UN PSI Principles for Sustainable Insurance, http://www.unepfi.org/psi
• Global Reporting Initiative GRI, www.globalreporting.org
• CDP, www.cdp.net

In addition to this first Sustainability Report released by the SIA, member companies that apply ESG criteria to their investments will either report explicitly on their activities and efforts on sustainability in their 2019 annual reports or expand their previous reporting on this topic. As in previous years, some of the larger insurers will publish a separate sustainability report.

In addition, all signatories to the Principles for Responsible Investment (PRI) have made a commitment to ensuring transparency as far as their sustainability strategy is concerned. The corresponding reports are available on the PRI website (www.unpri.org).

An encouragingly large number of SIA member companies took part in FOEN’s climate compatibility pilot test in 2017. This gave them an insight into the carbon footprint associated with their investment policy. The results prompted various insurance companies to rethink and adapt their investment policy.

The participating companies and other companies also intend to take part in FOEN’s climate compatibility test in 2020.

Allocation of resources in a sustainable and responsible manner and appropriate action has been an integral part of operational management at many SIA member companies for a number of years.

The SIA survey showed that in 2019, 25 SIA member companies already prepared an internal ecological balance sheet, which most publish annually.

The data in this Sustainability Report is based on 2017 and 2018. No official figures were available for 2019 at the time the data was collected. Numerous companies will publish this information in their annual report 2019. The vast majority of insurance companies in Switzerland base their ecological balance sheet on the internally recognised standard of the Association for Environmental Management and Sustainability in Financial Institutions (www.vfu.de).

This involves quantification and reporting of energy, water and paper consumption and CO₂ emissions,
which tend to be caused by business travel in particular. In addition, the individual companies report on a large number of other endeavours to reduce direct emissions and to encourage their employees to take responsibility for their sustainable behaviour.

An evaluation of the figures reported for 2017 and 2018 indicates a general improvement in the ecological balance sheet. The following table shows the figures per full-time equivalent (FTE).

_{3) Renewable electricity is a subset of total energy consumption and is also partly included in the subset of heating energy consumption.}

In particular, energy consumption and CO₂ emissions per full-time equivalent were down in 2018 in a year-on-year comparison. Paper consumption and waste volumes were also down considerably. This is an area in which selected specific efforts in the area of operational ecology are bearing fruit.

Reduction in energy consumption
Numerous insurance companies are systematically pushing to reduce CO₂ at their sites by adopting suitable building strategies, including switching to renewable energy sources such as hydropower or photovoltaics, or achieving certification to Minergie standard.

Business travel
When it comes to business travel, companies focus increasingly on sustainability and offer their employees considerable flexibility in working hours, with models that allow them to work from home or part time. The increasing use of technical aids, such as phone, video or online conferencing, helps to reduce employee commutes and business trips.

The core business of the insurance industry is underwriting; i.e. taking on risks that customers cannot or do not want to shoulder themselves. Underwriting is a task that is of key economic importance. Outsourcing risks creates security and releases energy that can then be used for innovation, progress and prosperity. In order for this to succeed, the insurance industry must be able to identify, understand and assess existing and new risks at all times. This makes underwriting the linchpin of the insurance business and explains why climate change and the associated environmental and social risks appeared on the radar of international insurers and reinsurers relatively early on.

The insurance industry is faced with two central challenges. It wants to offer sustainable solutions to deal with climate change and the consequences it entails. And it has to be able to identify, assess and mitigate the risks that arise as sustainability becomes increasingly established.

Effective prevention
Natural disasters rank among the most costly risks in the insurance and reinsurance business. It is in the interests of all stakeholders to ensure effective prevention for natural disasters. There is a direct and scientifically proven link between climate change and the frequency, intensity, extent and duration of natural disasters. The increase in annual claims payments made due to natural disasters over the last 20 years bears testimony to this development in the insurance business. These extreme natural events not only cause human suffering, they are also responsible for great material damage and increase the risk of social hardship and upheaval.

Tools such as a natural hazard radar can help to assess the risk exposure of real estate, allowing targeted protective measures to be taken. Insurers are successfully incorporating protection against floods and storms into building insurance policies in exposed areas. In developing regions, insurers use microinsurance as a tool to make poorer sections of the population more resilient to social risks (see Appendix).

In addition to the physical and social risks associated with climate change, insurers must also keep an eye on technical and regulatory risks. For exposed companies, such as those operating in the automotive or energy sectors, these can result from the transition to a low-carbon economy. Insurers can use their risk experience and data to provide these companies with advice, make recommendations on risk management and illustrate ways in which they can make sustainability a more established feature of their business practices. This allows insurers to help to prevent reputational damage and losses that pose a threat to a company’s survival. In the energy sector in particular, insurers use innovative insurance products to establish sustainable energy supplies.

Reduced sustainability risks
Some insurers use Sustainability Risk Frameworks to capture the various sustainability risks. They develop strategies to limit and mitigate these risks. In view of climate change and the need to reduce greenhouse gas emissions, fossil energy production is clearly one of the most significant sustainability risks. But managing sustainability risks involves more than just CO₂ emissions. Human rights violations, humane working conditions, arms production, nuclear proliferation, mining projects and environmentally unfriendly and socially detrimental infrastructure projects are also among the sustainability risks that insurers take into account in their underwriting practices.

Insurers also, however, have significant social and societal responsibility, particularly with regard to life, health and accident insurance. These are areas in which calls for sustainable action and the insurer’s social responsibility and/or obligation to assume certain risks can give rise to conflict or pose a major challenge. Can employees of a company guilty of compromising practices be denied insurance cover against industrial accidents or pensions?

In their quest to make sustainability an established part of their activities, insurers have to weigh up conflicts of objectives and interests very carefully. It may, for example, make sense not to insure a company with a poor environmental rating from a climate change perspective. But an insurer also has to consider the consequences for employees if it refuses to provide a company with social and health insurance. It may well be sustainable for insurers that take ESG criteria into account to refuse insurance cover for environmental reasons, but that decision may be questionable from a social perspective. A glance at the global economy reveals differences in the national legislation governing environmental and social standards. The social insurance system for employees in Switzerland, for example, is not the same as in a country where accident insurance is not compulsory. As a result, these questions regarding social and environmental sustainability show that the relevance of these matters differs for a national or regional insurer than for an international reinsurer.

The following implementation strategies used by insurers today should be evaluated bearing these questions in mind:

Exclusion
Some insurers refuse to insure certain companies or technologies. This involves definition of guidelines and exclusion criteria. Another focal point, also in the public eye, is exclusion of CO₂-intensive industries and projects in particular. An insurance company can opt to set a CO₂ quota as an upper threshold for insurance cover (see Appendix).

Engagement
Insurers define objectives that they aim to achieve and maintain, but companies that fail to meet the required conditions do not have their insurance cover withdrawn or denied. Rather, the insurers engage in dialogue with them to find a way in which the objectives can be achieved. For example, a company that relies on coal energy may be encouraged to reduce the proportion of coal and replace it with renewable energy sources. This allows the company to safeguard its reputation and assets, and to maintain room for manoeuvre in the future.

By developing new insurance products for new technology risks, insurers can promote these technologies – for example, in the energy sector – and help to reduce climate risks in the process. Thanks to the insurance cover, the financial risk for the investors involved is reduced and funds are freed up for other projects (see Appendix).