Making Better Decisions on the Journey to Net-Zero

Making Better Decisions on the Journey to Net-Zero
August 2, 2023 10 mins

Making Better Decisions on the Journey to Net-Zero

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Aon’s Transition Performance Index is helping businesses around the world navigate their transition to a greener future with clarity and confidence, while unlocking the capital needed to accelerate efforts.

Key Takeaways
  1. Aon’s Transition Performance Index draws on proprietary and public data to track companies’ progress toward net-zero.
  2. The Index provides consistent measurement of carbon emissions, allowing insurers to better underwrite the transition.
  3. Risk capital will play a critical role in supporting and financing companies’ energy commitments.

Climate — and how best to protect people, businesses, and markets from its negative impacts — is one of the most pressing issues for the world economy. And addressing it will involve a global collaboration across industries and communities.

Countries are recognizing the importance and urgency of seeking to limit global temperature increases to 1.5 degrees Celsius. Achieving this goal requires considerable planning and capital. Aon plays a key role in helping businesses around the world move toward net-zero by sourcing risk capital, which they need to accelerate their energy transition plans. 

As Eric Andersen, president of Aon, recently told the U.S. Senate Committee on the Budget: “At its core, our business is about creating resilience to both protect the assets of today and foster the growth of tomorrow. We do this by spreading the impact of risk across a wide community of financial participants across time to help people and businesses withstand volatility, to have the resources and confidence to invest, and to protect and rebuild when necessary.”

Insurers’ diverging emissions metrics

Data and analytics play a crucial role in measuring the progress to net zero. To confidently underwrite based on its clients’ reduction of carbon emissions, the insurance industry needs to gather data from businesses in a consistent way. If insurers use unnecessarily disparate and complicated metrics in their portfolios, it will negatively impact clients. 

On a recent climate panel, Steve Smith, head of research and development at Vantage Risk, said “the issue is around consistency of data and the ability to compare things side by side.” He followed by noting that the “main aim for insurers should be understanding firms’ transition plans, their general stance towards climate change.” 

The Net Zero Insurance Alliance (NZIA), a United Nations-backed body, was designed to coalesce (re)insurers’ efforts towards net zero carbon emissions by 2050. It initially endorsed its members’ use of the Partnership for Carbon Accounting Financials standards for uniform measurement of their emissions, but some insurers raised concerns about these standards, including their focus on historic – not projected – data, and for various reasons several carriers have exited the NZIA. Then, in early July 2023, the NZIA stopped requiring members to set or publish emission-reduction targets – removing any chance of a standard way to measure progress on decarbonising underwriting portfolios. Irrespective of the NZIA’s stance, the situation still leaves the insurance industry with the challenge of how best to measure portfolio emissions, resulting in insureds struggling to evidence their commitments sufficiently to insurers.

Insurers’ varying climate philosophies

At the same time, larger insurers have committed publicly to move away from hard-to-abate industry classes, but this does little to encourage the net-zero transition plans of companies in those sectors. Rachel Delhaise, head of sustainability at Convex, recently said “Just pulling out of classes shouldn’t be the focus, it should be on the transition plans of firms.” Aon firmly believes it’s important to support clients that are working to achieve net-zero commitments by providing risk capital that will help them accelerate their energy transition plans. 

Amidst the statements of commitment from large insurers to reduce capacity in hard-to-abate sectors – about $1 billion of capacity has moved from the Canadian market for certain sectors, for example – there have been welcome pivots to a more pragmatic approach. Thomas Buberl, CEO of AXA XL, has said that his firm, one of many insurers which have created a division focused on Energy Transition, will focus its support on clients with “credible transition plans.” 

Some perceive Allianz as having some of the stricter rules about underwriting in these sensitive sectors, but they have also recently reviewed their approach and methodology to measure carbon emissions. Chubb, meanwhile, introduced a new Climate business unit earlier this year, under the leadership of Maggie Peloso, and while they have made commitments to decarbonize their portfolio, they are nonetheless continuing to partner with brokers and clients in these tough energy sectors. 

Aon’s Transition Performance Index

To help the insurance market and businesses around the world with the confidence and clarity they need to make better decisions around transitioning to net zero, Aon has developed the Transition Performance Index. Aon’s Transition Performance Index helps track a company’s transition to a greener future and provides clients with publicly sourced data and Aon’s proprietary analytics to engage on investment and underwriting negotiations and deliver better results.

With our proprietary Transition Performance Index, we help clients evidence the trajectory of their climate transition plans to underwriters using datapoints which can (i) help those markets continue to support hard-to-abate sectors and (ii) assist clients to access the risk capital needed to accelerate their transition. 

Using Aon’s product together with data sourced from the public domain, the information Aon can provide looks to align with the taxonomy and disclosure standards of the Sustainability Accounting Standards Board, a leading reporting framework recommended by several key institutional investors and insurance carriers. 

Aon’s Global Consulting Leader for Natural Resources, Rob Colver, cites a recent example when we used the Transition Performance Index to support a client that was struggling to access insurance capacity due to negative perception around its transition credentials and industry sector. Through the Transition Performance Index, the client could demonstrate that its investment in green technology enabled the client to capture and store 70 percent  of their total CO2 footprint. This gave insurers confidence to provide long-term insurance capacity, which gave the client more free capital to further invest in transitioning to net-zero. 

Aon’s Transition Performance Index is an important step in harnessing relevant data which should enable insurers and insureds to not only measure their progress towards net-zero but the confidence to support and finance that transition.

 

1.5

Countries are seeking to limit global temperature increases to 1.5 degrees Celsius.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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