Natixis did not wait for the rest of the world to wake up to the reality of climate challenges and environmental awareness to take these aspects on board in its insurance business, as it strides forward taking an innovation-oriented approach.
The question of whether finance can be used to better serve the economy and the future of our planet is more relevant than ever amid today’s climate crisis. Finance looks set to get greener – in France among others – as companies and public sector stakeholders pledged in early July 2019 to go carbon neutral by 2050. This group includes insurers that are highly aware of the role they can play and the responsibility they have: these companies can make a significant contribution to the fight against climate change by making active choices in the way they finance the economy via their investment portfolios.
Strategy aligned on <2°C goal
In late 2018, Natixis decided to align its investment policy in the insurance business with the targets set out in the Paris Agreement to keep global temperatures at less than 2°C above pre-industrial levels.
This is a very clear and ambitious goal, with close to 10% of investments set aside for green assets each year across all asset classes, with the ultimate aim of green assets accounting for 10% of the total managed by 2030 at the latest.
“This target may look timid but it is already ten times more than our previous actions” notes Maxime Druais, ESG expert leader at Natixis Assurances, who states that “a target of 10% marks a truly bold commitment in today’s investment universe and equates to between five and ten times more than what we see on green commitments. The entire company is truly driven by a heartfelt conviction that we have a role to play and that we have a collective responsibility in the effort to promote ecological transition, so all our staff are really behind this goal” he adds.
A tailor-made analytics method
Measuring the carbon footprint for Natixis Assurances’ investment portfolios is a crucial indicator in defining its climate goals. This calculation is based on an individual assessment of carbon emission intensity (tons of CO2 equivalent per million euros of stock-market capitalization) using the Carbon Impact Analytics methodology. This approach measures emissions created by the company’s business using a lifecycle approach that takes on board direct emissions as well as those from suppliers and products, and also measures emissions that have been avoided as a result of efficiency efforts and the roll-out of green solutions. Each company is assessed individually using an analysis grid tailored to the specific business sector.
Clients and investors are all paying close attention to insurers’ involvement
The French Insurance Federation announced three initiatives at the end of 2017 designed to address climate change, including the target to include an ESG-certified investment vehicle with a focus on environmental, social or climate-related commitments in the green insurance range. Here at Natixis, this pledge became reality on January 1, 2019, as the company got involved in this commendable scheme and also helped address clients’ goals as they increasingly seek to invest their savings in sectors and businesses that do not worsen climate change.
“There has been a real sea change in France over the past three years, with those who are truly convinced by this approach standing out from the others” states Thierry Berthold, insurance senior banker and green captain in the CIB Insurance Coverage department at Natixis. “The situation now has really changed – insurers can no longer avoid this key issue and we are seeing a fundamental shift in trend. There are differing degrees of progress from one company to another but the trend has well and truly taken root.”
But will this commitment go as far as really transforming the insurance industry’s business model? This is highly possible as clients and investors now not only consider returns, they increasingly assess ESG integration as well as the environmental and social benefits their investments can provide, so they home in on companies that share their views. In this respect, they also benefit from transparency requirements in article 173 of the French law on energy transition for green growth (see inset 2), while regulatory bodies themselves, the ACPR (Autorité de contrôles prudentiel et de resolution, French insurance supervisory body) and the European Insurance and Occupational Pensions Authority (EIOPA), now require insurers to include climate risks in their stress tests. The main financial ratings agencies now also screen for ESG criteria in their analyses, and this shift is furthered by the launch of the SRI (Socially Responsible Investment) certification and the French TEEC label (Transition Énergétique et Ecologique pour le Climat or Energy and Ecological Transition for Climate), for investment funds, promoting those that direct funding towards energy transition and the green economy.
Transparency requirements for insurers
Article 173 of the French law on energy transition for green growth makes France the first country in the world to require institutional investors – insurers, provident insurers, pension companies and social protection companies – to report ESG data and information on the environmental aspects of their investment policies as well as their contribution to ecological and energy transition in their annual reports.
“We are seeing a real awareness and a transformation in society’s goals” adds Thomas Girard, product specialist in the Green & Sustainable Hub (GSH) at Natixis’ Corporate & Investment Banking division, in charge of business development with investor clients.
“The financial sector lies at the very heart of the economy and the insurance industry plays a vital role in promoting economic, social and environmental sustainability in its role as risk manager, insurer and investor. Insurers can also be seen as playing a social role as they support the development of a more resilient, inclusive and sustainable society. The insurance sector has embarked on a real deep-seated transition and the sector now sees sustainable development as a way to reduce the risks it manages – particularly climate change risks – while also creating fresh business opportunities with its policyholder and investor clients.”
Today’s challenge for insurers is not only winning over end clients, but also supporting each individual to take ownership of his/her actions and decisions to ensure they do not endanger the planet. Supporting our policyholders as they adopt a responsible approach is a key component of Natixis’ green strategy.
Impact of climate change?
Insurers are directly affected by climate change resulting from greenhouse gas emissions as they face claims due to the increase in both the occurrence and severity of natural disasters such as floods, hurricanes, drought, fire, etc.
This situation has admittedly not led to any changes in European insurers’ credit ratings due to the geographical breakdown of their insurance business as well as their flexibility in setting prices, but the increase in the frequency and cost of natural disasters requires that this situation be closely monitored using climate stress tests in particular. Solvency II regulation already admittedly factors in natural disaster risks in the SCR calculation (Solvency Capital Requirement), but estimates of this risk and other climate risks are based on past events, whereas climate change means that projections of future events must also be considered.
“When we analyzed how insurers were exposed to climate change risks, we realized that this not only involved claims payments, but also regulatory and investment aspects” notes Antoine Houssin, credit analyst in the Global Markets Research teams at Natixis’ CIB arm.
“Solvency II does not take on board the green aspects of investments, the amount of pollution the generate or the overall level of the insurer’s carbon intensity in the SCR calculation, but that could change when the system is revised in 2020” he concludes.