Decarbonising portfolios: an insurer’s path to integrate climate risk

Insurers play a crucial role in addressing climate change and achieving net zero emissions, and it requires adopting a comprehensive approach to assessing and managing climate risks throughout their business. To this end, insurers must deepen their integration of climate risk into asset allocation and investment processes, presenting complex challenges that vary by type of insurer and ESG regulations in each market.

Know your starting point

Many insurance companies are taking steps towards integrating climate risk into their asset allocation and investment processes, but for some, it is unfamiliar territory. The starting point for these companies is a thorough assessment of their current carbon footprint. This involves analysing their assets in Scope 1 and 2 emissions, as well as identifying material Scope 3 emissions in high-impact sectors. Portfolio temperature alignment scores and Climate Value-at-Risk (CVaR) are useful for providing a forward-looking evaluation.

Measuring portfolio emissions can be challenging, as carbon data are not universally available across all asset classes. Some assets, such as listed equity, have more reliable data than others. Furthermore, the quality of the data may vary, depending on the existence of a carbon footprint methodology, supportive regulations, and a decarbonisation framework for the asset class. Temperature alignment scores and CVaR measures embed assumptions that are highly uncertain. Therefore, they must be considered in combination with other measures as part of a holistic climate risk assessment and require ongoing monitoring.