How insurers are driving sustainable investments

As some of the world’s largest institutional investors, insurers have an important role in making investment more sustainable. But there is no one-size-fits-all approach, outlines Craig Campbell, head of UK responsible investment at Aon.

As long-term investors, insurers can help drive the transition to a low-carbon economy. In the UK alone, the insurance industry manages investment of £1.8trn. As a whole, Europe’s insurers invest over €10.6trn in the EU economy. Clearly their investment decisions have a significant impact on promoting sustainability.

Further, insurers have a vested interest in sustainable investments due to the direct consequences that climate change and a disorderly transition can have on their businesses and customers. Last year, the economic cost of natural disasters totalled $380bn – 22 percent above the 21st century average, according to Aon’s Climate and Catastrophe Insight 2024 report.

This article explores the benefits of sustainable investment strategies for insurers and the key factors driving this growing trend.

Mitigating climate-related risks

There is a direct benefit to insurers if the net-zero transition is orderly and driven by broader sustainable institutional investment. The industry helps protect businesses and individuals from all climate-related perils, including wildfires, storms and floods. By investing sustainably, insurers can also contribute to the prevention and management of such perils to reduce losses.

However, as climate risks intensify, some might become uninsurable or require proactive measures to maintain insurability – for instance, homeowners may have to flood-proof their property to access flood insurance. Sustainable investments enable insurers to proactively address climate risks and support resilient communities.

Supporting renewable energy and sustainable initiatives

Insurance also serves as a facilitator. It enables investment in renewable energy, insures electric vehicles and endorses sustainable building materials, to mention a few. These actions encourage the growth of environmental sustainability and contribute to mitigating greenhouse gas emissions.

Aon’s Transformative Trends research identified a $25bn-premium opportunity for insurers related to five climate and biodiversity trends: carbon capture, decommissioning carbon-intensive assets, biodiversity, resilient infrastructure and electrification.

But beyond profit, insurers can also collaborate with the businesses they invest in to encourage better climate-related practices. This engagement drives innovation, while also inspiring responsible business behaviour and catalysing positive change across industries.

Regulatory and business drivers

Insurers pursuing more sustainable investment strategies can reap several business benefits and align themselves with regulatory requirements. Sustainable investments offer long-term growth potential and provide commercial opportunities. Insurers have an increasing appetite for private debt and infrastructure debt investments, which, in addition to a good risk/return profile and fit for insurance liabilities, align well with climate transition goals.

In addition, embracing sustainable investments enhances risk frameworks for insurers, mitigating sustainability risks and their associated financial and reputational consequences.

Growing regulatory measures further drive insurers to adopt sustainable investment practices. The European Insurance and Occupational Pensions Authority, for example, recently published a consultation on the merits of increased capital charges for fossil fuel assets.

While reporting frameworks like the Task Force on Climate-Related Financial Disclosures may sometimes be viewed as a mandatory box-ticking exercise, they do ultimately help improve existing risk management programmes and support better decision making.

Overcoming challenges

While there is widespread acknowledgement in the industry that limiting climate change is imperative, views vary on how investors should play a part. Limited priority given by boards and investment committees to sustainable investments, along with a lack of stakeholder engagement, can impede progress. Additional hurdles include limited transparency and standardisation of data and reporting, as well as resource constraints for assessing and implementing sustainable investments.

These challenges may differ between regions, with insurers in some jurisdictions less keen or less able to invest sustainably given more general political and societal views, which can then also impact their subsidiaries in other countries.

The latest report from the Principles for Responsible Investment highlights the continued progress of North American signatories in key areas, albeit with comparatively fewer public disclosures on responsible investment than their counterparts in Europe, Oceania and Asia. Notably, Q1 2024 witnessed a surge in outflows from sustainable investments in the US, while European sustainable investments, commanding a significant share of global sustainable fund assets, have been on the rise.

Our institutional investor clients are proactively addressing these challenges through a comprehensive approach that includes:

Actively implementing these measures helps to further embed sustainable investment principles across the organisation and drive positive impact within the investment community at large.

Finding the right strategy to sustainable investment

While approaches to sustainable investment may vary among insurance companies, the goal remains consistent:

As sustainability factors continue to influence investment decisions, it is important that insurers understand the evolving dynamics of sustainable investing and its impact on their business, both now and in the future.

No one-size-fits-all approach exists for responsible investing. A crucial first step is to clearly articulate within the organisation how key concepts, such as sustainability and sustainable investment, are defined.

Insurers have the power to shape a future where the transition to a low-carbon economy is not just a necessity, but a thriving reality. By embracing sustainability, insurers can not only mitigate climate-related risks and support renewable energy initiatives, but also seize long-term growth potential and commercial opportunities.

With every investment decision, insurers have the chance to contribute to a more sustainable world, leaving a positive impact on businesses, individuals and the planet – and paving the way for a future that is both economically prosperous and environmentally responsible.