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Insurance sector gives mixed performance on sustainability: Ceres

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Insurers and brokers have a mixed record on evaluating and incorporating climate risks and opportunities into their operations, lagging behind other sectors in holding their senior executives accountable for sustainability performance and offering financial compensation for meeting targets, but outperforming them in discussing climate risks in their financial disclosures, according to a new report.

The Turning Point: Corporate Progress on the Ceres Roadmap for Sustainability report uses data provided by Paris-based environmental, social and governance research provider Vigeo Eiris to assess the progress of more than 600 of the largest U.S. publicly traded companies toward meeting the expectations established in the Ceres Roadmap, published by the Boston-based investor coalition and sustainability advocacy group Ceres.

U.S. corporations have made progress in committing to sustainability, but they need to take more concrete steps to fully implement those commitments. For example, while 64% of these companies have committed to reducing greenhouse gas emissions, only 36% have time-bound, quantitative targets to do that.

“We’re not seeing some companies acting as boldly or quickly as they need to,” said Kristen Lang, Ceres’ company network director and co-author of the report. “We’re continuing to see a smaller group of leadership companies continuing to innovate, continuing to raise the ceiling, but the time has come where we need more companies to put forward scalable solutions and really lifting the floor. We need more companies to be translating those commitments they are making into action that’s creating change on the ground.”

Overall, companies are demonstrating increased accountability for sustainability at the senior level, which is “driving greater performance commitments and more ambition in business integration,” she said, adding that 98% of companies with time-bound, corporate-wide commitments to reduce greenhouse gas emissions have a senior-level executive held responsible for sustainability performance, compared with the average of 65% of all companies assessed.

“There is a point where we are seeing more companies stepping forward to create that accountability and our hope is that that will start to drive more action down the line,” Ms. Lang said.

But the insurance sector lags in terms of designating senior accountability for sustainability performance, although the number has increased from 17% of insurance sector companies in Ceres’ 2014 report to 38% in this report – growth that is “quite promising,” she said.

While 24% of all assessed companies offer their executives financial incentives for sustainability performance, no companies within the insurance sector are currently linking executive compensation to sustainability performance metrics, Ms. Lang said.

“Executive compensation and actually have sustainability hit the paycheck is something that is slower to move … in particular because it’s changing the very definition of the way they think about what’s critical and business imperative for the company.”

“The insurance industry is slow to change and that’s pretty much across the board,” said Cynthia McHale, director of the insurance program for Ceres. “When we talk about making progress on sustainability challenges and opportunities, I think once again we’re seeing the U.S. insurance industry slow to make those adjustments when compared to other sectors. That being said, change is happening. It’s taken a while for insurers, many of them anyway, to see sustainability as core to their business success. They didn’t quite see how it made financial sense for them to make these adjustments. Insurance companies tend to be very cost conscious. When they see taking steps to improve sustainability also reduces their expenses, they are much more likely to step on board.”

The insurance sector outperformed the average in terms of discussing climate risks in their financial disclosures, with 72% of the analyzed companies in this sector making such disclosures compared with 51% overall, Ms. Lang said, adding, however, that most of this discussion focuses on risks rather than opportunities.

In addition, the insurance industry is “underperforming” in terms of directly engaging shareholders via annual meetings, analyst calls, investor days and other forums on sustainability strategy and performance, with only 28% of companies in the sector engaging in this manner compared with 43% overall, she said.

While insurers have started improving their climate disclosures over the last six to seven years, “it’s nowhere near where it needs to be,” Ms. McHale said. “There was a small cohort of leaders. That number has increased, and I think that’s great. We have tried to emphasize the positive, but in reality, for most of the industry, the quality of the disclosure is below, and significantly below, where it could be.”

There are “some glimmers of slight improvement,” Ms. Lang said, citing New York-based American International Group Inc. as an insurer that talks about both climate risks and opportunities.

AIG’s 2017 annual financial filing states climate change-related catastrophic events pose a threat to property and could create lost assets, increase claim costs, and interrupt operations and recognizes that legal, regulatory, and social responses to climate change may affect the company’s business, such as the potential for new regulations that contradict the company’s current assumptions. But the insurer also describes climate change as an opportunity, citing potential adaption of its underwriting, product development, modeling and sustainability practices to climate-related risks and in providing customers with innovative products and services that anticipate these risks, according to the Ceres report.

However, both overall and for the insurance sector, the majority of disclosures in financial filings “have yet to become really decision useful for investors, (they’re) really lacking nuance and sticking to the boilerplate language in terms of what those risks look like,” Ms. Lang said.