Insurers – Climate

Objective

Objectives

Methodologies have been developed to assess the compatibility of a loan portfolio with environmental objectives such as the Paris Agreement. Numerous methodologies exist, with different approaches and different reference scenarios, and there is currently no scientific or regulatory consensus to favor one over the other. Calculating the alignment of a loan portfolio makes it possible to assess whether the activities financed are following a pace of transformation, of decarbonization, in relation to a reference scenario. Calculating the carbon intensity of a portfolio enables us to relate its_CO2 emissions to its size. The scientific and expert committee has issued a number of recommendations to help define an alignment strategy.

Participation in Net Zero alliances

The ‘Net zero asset owner alliance’ is a program launched in September 2019 as part of the United Nations Environment Programme Finance Initiative (UNEP-FI). By joining the alliance, signatory investors commit to aligning their investments and portfolios with net zero emissions targets by 2050

Target tracking

A number of metrics can be used to track the progress of players in relation to the commitments they have made.

Carbon footprint

The carbon footprint corresponds to the carbon emissions generated directly or indirectly by an entity. Generally speaking, it is expressed in_CO2 equivalent, i.e. it shows the entity’s emissions of all greenhouse gases expressed in_CO2. These emissions can be divided into 3 scopes.

• Scope 1 corresponds to direct emissions.
• Scope 2 corresponds to indirect emissions linked to energy consumption.
• Scope 3 covers other indirect emissions. For financial institutions in particular, it is important to divide Scope 3 into two parts.
  • The first corresponds to the indirect operational emissions of financial institutions (waste emissions, employee travel, etc.). In the GHG protocol, this corresponds to scope 3.1 through to 3.14.
  • The second part corresponds to indirect financed emissions. This involves calculating the scope 1, 2 and 3 of the companies financed by the financial institution up to the level of the share it finances. In the GHG protocol, this corresponds to scope 3.15.

Most of the emissions generated by a financial institution correspond to its financed indirect emissions. This metric is used in particular to measure the objective of contributing to carbon neutrality. As a reminder, carbon neutrality can only be used at the global level; at the level of financial institutions and businesses in general, we speak of a contribution to carbon neutrality, as ADEME emphasizes in its March 2021 note. In order to track this contribution, the institution must calculate its carbon footprint on the one hand, and its carbon offset on the other, corresponding to the carbon sinks it will generate to offset greenhouse gas emissions.

Default temperature

Temperature calculations are based on carbon emission calculations and on the climate strategies of financial institutions, which enable us to define an entity’s climate performance. One or more climate scenarios are then defined. Climate performance is then compared with these scenarios to give the temperature of the portfolio. These calculations can be performed for the entire portfolio or by sector.

Analysis of sector alignment and suitability of energy or technology mix

Sectoral alignment analysis is based on methods for measuring the alignment of financial portfolios with decarbonization scenarios for certain key business sectors, generally those most sensitive to transition risks. These methods measure the gap between the carbon intensity recommended by each sector to achieve the Paris Agreement objectives and that of the companies in the portfolio. The energy mix or technology adequacy analysis consists of transposing the 2°C carbon budget issues to a change in the energy mix (for energy companies) or technology (for carmakers). Current and projected mixes are compared with International Energy Agency targets.

Climate risk assessment

Insurers analyze the physical and transitional risks associated with their investments. Methodologies are often not yet mature enough to calculate the potential financial impact associated with these risks. Some methodologies provide a risk score. Other insurers limit themselves to a qualitative risk assessment.

Physical hazards

Physical risks are risks resulting from damage directly caused by meteorological and climatic phenomena.

Transition risks

Transition risks are risks resulting from the implementation of a low-carbon economic model. Transition risks include political risks (e.g., the introduction of a carbon price), legal risks (e.g., an increase in climate litigation), technological risks (e.g., disruptions in energy storage and carbon capture), market risks (e.g., changes in supply and demand as a result of the growing awareness of climate risks) and reputational risks.

Amounts eligible for Taxonomy

The European Taxonomy classifies economic activities as environmentally sustainable, and is applicable to all member countries. Launched at the initiative of the European Commission, the Taxonomy defines criteria by sector of activity to harmonize the definition of investments considered sustainable. To be considered environmentally sustainable, an activity must: i) meet one of the six objectives of the Taxonomy, ii) cause no collateral damage to one of the other 5 objectives (DNSH) and iii) comply with the minimum guarantees of social law, iv) respect the technical criteria and thresholds defined by activity. In January 2022, the Taxonomy came into force for the first two objectives. The next four are due to come into force at the beginning of 2023. Some insurers have decided to implement this calculation on a voluntary basis, ahead of its regulatory application.

Green investments

The insurance business requires a variety of financial investments to cover the future risks of policyholders. Insurers are certainly the financial players most concerned by climate change: on the one hand, they insure private and public individuals against the effects of climate change, but on the other, they must ensure that they can cover their commitments to their policyholders. Various types of green investment exist today to finance the transition to a low-carbon economy. Green investments include the following:

• Environmental theme funds (including green bond funds, listed equity funds including low-carbon funds and private equity funds);
• Green infrastructure;
• Direct investments in green bonds (see chart below);
• Green real estate (real estate with environmental certifications such as Leadership in Energy and Environmental Design (LEED), Building Research Establishment Environmental Assessment Method (BREEAM), Haute Qualité Environnementale (HQE), etc.).

Bonds

Bonds are loans issued by companies on the financial markets. Extra-financial conditions can be attached to bonds at the time of issue. This enables investors to choose to support companies and projects according to defined criteria, such as environmental or social criteria.

Labels

Labeling a fund enables a player to certify the management process and the selection of issuers in its portfolio according to the various criteria required by each label. Labeling a fund guarantees that it complies with the specifications specific to each label, and reassures customers in their selection of responsible products.

The Greenfin label allows you to invest in funds that respect environmental criteria. One of the special features of the Greenfin label is that it excludes funds that invest in fossil fuels or nuclear power.