Responding To Climate Change: The Insurance Industry

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With £236 billion to invest in other companies, insurance giant Aviva takes a close interest in how well they are responding to the challenges of climate change. Here, Director of Corporate Responsibility Marie Sigsworth sets out the reasons why disclosure of non-financial information is set to become increasingly important for investment decisions.

“.....The urgent need economy in the use of fuel and restriction of the use of power, was well recognised, and the formation of the Ministry of Fuel and Power only served to emphasize the necessity...... Two stewards were appointed from the staff of each floor to the building to supervise the saving of light wherever possible, and in the main, the delicate task was carried out with consideration and tact, resulting in the following savings: 266,766 units used in 1942, 196,196 units in 1943, saving of 26 per cent.

Naturally, this diminution of light, causing in some cases eye-strain and headaches, was not welcomed, but it was tolerated as part of our contribution to the War Effort and in the hope the necessity will pass soon.

All short journeys by lift were stopped, and everybody was expected to walk two floors—a regulation that might well be enforced in the post-war years, as we were getting lazy in this respect and all the better for the exercise. The period of artificial heating was limited and heat was reduced. At times we felt cold, but temperatures rose as we reflected that our enemies were the primary cause of our discomfort and anathematized them accordingly.

The result in power and heating ... may be explained to the uninitiated that the total saving was equivalent to 116½ tons of coal.”

Extract from: The Cucao Link, Staff Magazine of the Commercial Union, Autumn 1943, page 76-77. Courtesy of the Aviva Group plc archive, Surrey House, Norwich.

New fight, new focus

The focus of our fight today is very different, but the need to reduce our dependence on fossil fuel remains. In his 2006 report, Lord Stern advised that the financial impact of climate change, if countries don't act now, would leave the world will facing a depression worse than that of the 1930s. The report put the cost of global warming and its effects at $9 trillion – a bill greater than the combined cost of the two World Wars and the Great Depression.

Knowing the impact that man-made greenhouse gases have on the world’s climate, business needs to have a response. Careful management of resources for the benefit of the world’s wellbeing should be second nature for responsible companies, and it makes sound commercial sense.

Aviva recently signed an open letter from the Aldersgate Group to Lord Mandelson calling for greenhouse gas reporting to be made mandatory for all large UK organisations as soon as possible. At the time, Steve Waygood, Head of Sustainability Research and Engagement, Aviva Investors, commented, "We believe that climate change represents a profound market failure. There is a clear need for much tougher policy measures on the international stage, as well as at the national level. While Copenhagen failed to deliver internationally, the UK is well placed to make carbon reporting mandatory in the UK. This would allow investors to more easily identify climate change risks and opportunities. If we conclude that climate change is potentially material then we have an informed basis on which to make our investment decisions."

The insurance industry has a fundamental role to play in the debate on climate change. It is our customers who suffer the direct consequences of extreme weather events and we have a responsibility to help mitigate the threat of environmental change. Insurers have access to historical weather data which allows us to see how the frequency, strength, and physical and economic impact of extreme weather is changing. We can also look forward, with the help of catastrophe and climate change models, to understand where the future risks lie and we’re starting to understand the impact of the losses at different future temperature scenarios. Further, we have the financial tools to assist in managing the burden of climate change, including the pool of risk and risk transfer mechanisms.

We have 50 million customers and raising awareness of climate change and encouraging them to play their part is key. As a major life insurance provider we are seeking to understand better the linkage, risks and impact climate change has on health and life expectancy. Our General Insurance business has worked on better flood mapping and is working with communities in the creation and mobilisation of flood plans. We recognise that flooding has very physical and emotional consequences and is the current trigger that brings our customers face to face with the effects of climate change.

We’ve investigated technologies and materials which make properties more flood resistant and resilient and have included these options in property reinstatement. Looking at everything from replacing floorboards with concrete floors, to installing special valves on toilets and repositioning electricity sockets further up the walls which all help to reduce the physical impact of a flood. We’ve even explored advanced drying techniques to return customers to their properties more quickly.

Carbon impacts, investor decisions

A company’s carbon impact can be material to its value and we use various tools to help us assess this. One of the tools we use is the Carbon Disclosure Project (CDP), which on an independent basis, invites companies to report on how they perceive climate change relates to their business in terms of risk and opportunities, and the impact of their business on climate change.

As a major investor in other businesses – Aviva Investors has £236 billion in funds under management – we have a strong interest in the results of CDP on a number of different levels. Firstly, we believe that our primary role is to ensure that our clients’ portfolios benefit from the financial opportunities associated with climate change and avoid, as far as possible, the financial risks. The CDP data helps us to determine the quality of an individual company’s management response and is a factor in our overall buy, sell and hold decisions.

Secondly, where we conclude that climate change is a material risk or opportunity for the companies in which we have substantial shareholdings – but have concerns about the quality of the response to CDP – then we can enter into informal discussions with the business. If necessary, we make specific recommendations for change. At one extreme, if a company has not responded to the CDP, then we advise them that unless this changes, we may abstain, or even vote against the report and accounts at the company’s next AGM. This is proving quite a successful sanction. Of the companies we’ve spoken to on this issue in the past three years, 82% have now responded to the CDP.

Lastly, we also recognise that we have an ability to help shape policy debate on climate change. We use our influence carefully and strategically and the body of information now generated by the CDP enables us to determine at the macro level just how far the majority of companies have to go until we are collectively managing the key risks and opportunities associated with climate change.

Most of Aviva Investors’ engagement with policy makers is conducted in collaboration with other responsible financial organisations. For example, we are an active member of the Institutional Investors Group on Climate Change which recently issued a statement, signed by global investors collectively worth over $13 trillion, urging world leaders to negotiate a strong and binding successor to the Kyoto Protocol.

We took a further step, when Paul Abberley, the chief executive of Aviva Investors London, urged stock exchanges around the globe to codify how they could promote more responsible business. At Aviva we’re looking to put our corporate responsibility report to a separate investor vote at our next AGM in April. We’ll be the first company in the UK, and the first financial institution in the world to do so.

For companies that are still sceptical about the value of responsible behaviour in this area, it’s worth looking at Aviva’s own experience; at the moment approximately 91 million or 3.4% of Aviva’s shares are held in ethical, SRI or sustainable funds; we have bucked the economic trend of divestment in stocks, as the figure is up from about 80 million this time last year. So if CFOs have concerns about disclosing information around non-financial information here is a tangible benefit that we’ve seen first-hand.

Marie Sigsworth is Director, Corporate Responsibility, Aviva.
Aviva is the world’s fifth-largest insurance group and the largest insurance services provider in the UK. Its main activities are long-term savings, fund management and general insurance, with 54,000 employees serving more than 50 million customers in 28 countries around the world.