Insuring the future
assesses the insurance industry's financial
stake in the environment and describes
Insurance companies can play a pivotal role in environmental conservation. An increasing number around the world are focusing significant management attention and resources in this direction, even though not faced with regulatory requirements to do so, for several reasons:
- Environmental conservation goes hand in hand with loss prevention, a core activity for innovative insurance companies;
- Preventing losses by taking precautionary measures is a key driver of profitability in our business and a key element in reducing risks for our clients;
- Most of our customers are pleased when they see us taking proactive environmental positions;
- A well-executed environmental action plan strengthens company reputation and good-will;
- Some of us believe that we can improve our investment performance by incorporating environmental knowledge into our investment decisions.
Many insurance companies have taken the unusual step - with UNEP's support and encouragement - of creating an industry association specifically to move the environmental agenda forward. This UNEP Insurance Industry Initiative (III) is expressed through the Statement of Environmental Commitment by the Insurance Industry, signed by about 60 leading companies around the world.
Typically, insurers are not polluters: but they have particular influence on some operational aspects of industry, particularly those concerned with occupational health and safety and certain environmental risks. When there is a fire or accident - or clean-up and rebuilding after a natural catastrophe - there are often significant environmental implications. Prevention is not only environmentally better, but is usually more cost-effective than the total economic or insured losses - which include the costs of emergency response, remediation, interruption of business activities and repair.
Insurance companies have a direct financial interest in reducing losses through preventing accidents and ensuring that, if one occurs, its effects on human life and the environment are minimized. We contribute to industrial prudence and precaution through loss prevention requirements and by differential pricing for different levels of risk. We can motivate customers to adopt preventive behaviour by rewarding it with lower insurance premiums. There are, for example, requirements to avoid certain materials - for example, asbestos, chlorofluorocarbons (CFCs), corrosive paints, volatile organic components (VOCs) - in certain applications, to maintain certain types of equipment, and to train employees in preventive behaviour, waste management and operational procedures for due care.
Leading insurance companies maintain state-of-the-art centres where they train industrial clients in preventing fires, spills and chemical explosions, in emergency response, and in occupational safety and health: at Storebrand we have trained 15,000 customers over the past three years. Encouraging car and truck drivers to drive safely not only avoids accidents and saves lives, but prevents pollution. Insurance companies are often in the first line of emergency response to leaks and spillages that can have dramatic environmental effects. Many are major real estate owners, and can make a real difference by minimizing environmental impacts through, for example, replacing CFCs in refrigeration systems, reducing waste and introducing recycling systems for their tenants.
Integrating environmental risk and opportunities into asset management has exciting potential, and is likely to command increasing attention from financial analysts. Proactive corporate responses to environmental issues can drive product and corporate competitiveness and increase shareholder value.
Insurers know that environmental risks are financial risks. We increasingly reflect this in the kinds of coverage we are willing, or unwilling, to provide - and in its price. Claims about pollution from Super-Fund hazardous waste sites caused a crisis, and we do not want another one to come about as a result of climate change.
Insurers also manage large pools of capital, whether on their own balance sheets or on behalf of such customers as life insurance or pension companies: but they have rarely reflected environmental risks in portfolio management decisions. Yet if environmental risks affect the liabilities side of our balance sheets, they must also affect the asset side. Some leading insurance companies and banks are beginning to take steps to correct this. This development is still in its infancy because:
- Environmental risks and opportunities are poorly reported in annual reports and financial statements, if at all;
- Information is either too vague or too specific, interesting to an environmental engineer but not to a portfolio manager;
- There are no international standards for environmental reporting, making it difficult to compare a company's environmental performance and prospects against its competitors'; so the stock market is not yet effectively pricing environmental risks and opportunities.
Yet if institutional investors like ourselves can correctly integrate environmental information into our assessments of companies' future prospects and competitive positions, we ought to be able (all other things being equal) to get better financial performance from our portfolios.
At Storebrand, we established the Storebrand Scudder Environmental Value Fund - in conjunction with Scudder, Stevens & Clark - last June to capitalize on this opportunity: its total value is $75 million and its initial investors include Swiss Re, Trygg-Hansa, Gerling, Orkla and Storebrand. We have developed a proprietary approach to evaluating companies based on a combination of financial and environmental criteria and the concept of eco-efficiency propounded by the Business Council for Sustainable Development. We are finding that this provides competitive investment performance relative to world stock market indices, and we aim to create a diversified portfolio of global equities representing responsible environmental practice across major industries.
We focus on nine criteria when evaluating companies: product characteristics; toxic release; environmental management quality; material efficiency/recycling; energy intensity; global warming; ozone depletion; water use; and environmental liabilities. By assessing these dimensions of environmental performance between competitors in a variety of industries - such as chemicals, transportation, insurance, electronics and shipping - we will be able to compute an environmental dividend and report it in a similar way to financial performance.
I hope that institutional and pension investors will develop profitable approaches that take much greater account of environmental risks and opportunities in portfolio management. These should satisfy both the strictly financial aspects of fiduciary due diligence and the broader welfare aspects of fiduciary responsibility concerned with avoiding causing undue environmental harm to our savers and their beneficiaries. The concept of sustainable development, seeking to respect the needs of future generations, can thus gain operational meaning in pension funds management.
The fact that 60 insurance companies from Europe, North and South America, Japan and Africa have signed the UNEP Statement of Environmental Commitment by the Insurance Industry shows that a broad cross-section of the industry identifies with the message. The UNEP III concerns a range of environmentally-related issues and business-like responses to them. Last year it organized the first Annual UNEP Insurance Industry Conference, where insurers presented actual case studies on approaching practical problems and the workability of solutions. Next year, we will hold our second Conference in December in Tokyo, to coincide with COP3 Climate Change Negotiations in Kyoto.
The Statement - whose Steering Committee consists of Employers Re, General Accident, Gerling, NPI, Swiss Re, Sumitomo Fire and Storebrand - does not define what is included under 'environmental risks' (it mentions climate change, not to suggest it is the overriding environmental problem, but to express our acceptance of the claim of the Intergovernmental Panel on Climate Change that mankind is contributing to global warming and that this constitutes a material risk). Among its goals are:
- To integrate environmental concerns into all aspects of our businesses, including risk assessment, underwriting, real estate operations and asset management;
- To develop and implement environmental criteria in our purchasing decisions. Over time this will apply not just to office supplies and equipment but, more importantly, to suppliers of car repair services, real estate reconstruction after fire and water damage, and so forth.
The UNEP Statement is voluntary: no local or regional governmental body requires it. Its power is in harnessing the dynamics of the market for environmental good. Each signatory has something to gain. The direct environmental good that results is a positive gain. We can benefit from lower claims and increased profitability due to loss-prevention activities. We get positive publicity, benefiting our reputation among both customers and regulators. And we get the chance to acquire valuable know-how by interchanging experiences with other signatories.
The Statement is a call to action: a statement of purpose rather than a set of guidelines. By speaking out publicly, we remind ourselves of what we stand for. By standing up to be counted, we force ourselves to deliver. The Initiative is thus potentially a very powerful agent for change.
Carlos Joly is Senior Vice-President, Storebrand, Norway.