ESG with AXA XL: Behind the scenes
An introduction to ESG
ESG (Environmental, Social and Governance) has spread throughout the corporate world. It is the term used to describe a wide range of activities that companies are taking to support employees, investors, customers and other stakeholders and the physical environment.
When talking about ESG, climate change often takes centre stage. However, it is important to remember that this is only one part of the ‘E’. It is understandable that insurance has focused on climate risk and climate change, as it is such a huge source of loss for the industry. However, it is necessary to consider all aspects when creating an ESG strategy.
Various aspects of ESG are connected; an example of this is the energy transition and its social effects. Katie highlighted that as investors and insurers divest from energy-intensive and high emitting industries, there is a real risk of creating power poverty in some areas of the world. Divesting completely from coal or oil can disrupt the economic development of countries that are still wholly reliant on thermal-fired generation, for example. Recognising this interlinkage is all part of a ‘just energy transition’.
What is AXA doing?
AXA has made addressing the problems of climate a core part of its strategy for many years. Not surprisingly, it ranks highly on activist ESG rankings including the Insure our Future network leader board.
When building up its ESG strategy, AXA created two focus strands: its internal business operations and its clients, products and services. A key aim of the AXA ESG strategy is to bring these activities to life through the publication of ‘good news stories’.
The former refers to AXA’s carbon reduction planning, waste and water management, diversity and inclusion strategies and board governance.
Good news stories in relation to these internal business operations have included announcements on the company’s recently revamped office building, including installing LED lighting which has reduced its carbon footprint.
AXA is also keen to highlight how its existing services are already making an impact. A recent good news story focused on how AXA’s life, accident and health offering provides services to those who would otherwise be financially excluded from certain insurance products due to long term health conditions.
Katie pointed out that the recognition of existing good news stories is allowing colleagues to understand what has already been done before talking about next steps and new ideas.
AXA is also focused on measuring impact and change across the organisation – it publishes its climate impact in annual reports. They are published in adherence to the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. In these reports AXA covers the warming potential measurements on its investment portfolios and levels of client engagement.
However, calculating GHG emissions for AXA XL in particular is a challenge; a challenge that insurers are now taking on.
GHG emissions – the measurement challenge
For insurance companies, Scope 1 and 2 emissions are relatively low. Scope 1 refers to GHG emissions that a company makes directly, and Scope 2 are GHG emissions produced on behalf of the company by others. This includes the electricity or energy that companies are buying for their heating and cooling systems.
Scope 3 accounts for all other emissions that are a part of a company’s value chain. This includes products it buys from suppliers, the emissions from when it uses those products, and also the emissions related to when customers buy the company’s products. Scope 3 is often considered to be the sum of the Scope 1 and 2 emissions of all of the other companies in a single company’s value chain. The most relevant areas to insurers are their investment and underwriting portfolios and their claims handling process – all of which fall into Scope 3.
The evaluation of Scope 1 and 2 GHG emissions is commonly being outsourced by insurers to the larger consultancies and accountancy firms. However, Scope 3 emissions are a lot more challenging to calculate – especially for insurers.
“We need to make sure we have a consistent methodology across the industry for calculating Scope 3 emissions.” – Katie Lennon
The Net-Zero Insurance Alliance (NZIA), which was convened by the United Nations (UN) in 2021, aims to create a consistent methodology for calculating Scope 3 emissions across the insurance industry.
The NZIA is attempting to overcome challenges such as double-counting across investment and underwriting portfolios. Additionally, insurers can sell many policies to a single client, so ensuring there is no double-counting across policies is also necessary. Allocating emissions down to a single policy, such as a property, casualty or security risk policy, is also a challenging task that needs an industry-wide consistent methodology.
The NZIA is collaborating with the Partnership for Carbon Accounting Financials (PCAF) to develop this global methodology standard, which is the first of its kind. The NZIA is aiming to publish this in the second half of 2022.
ESG reporting – an opportunity for insurance technology?
The NZIA is reported to be working with a number of commercial partners that could provide some of the framework solutions to the methodology it is creating.
When the methodology is published in the second half of 2022, there will be improvements and developments that could be made to it. There is an opportunity for companies that have ideas about harnessing data in a different way to get involved.
One of the biggest challenges that the insurance industry is about to face from a data and analytics perspective is to do with large volumes of unstructured data. Insurers will start asking companies about their ESG strategies and net-zero transition pathways, and will likely receive this information in a variety of formats. This could become a serious choke point that technological solutions could solve.
“When we start asking our clients and companies about their own ESG strategies and their net-zero transition pathways, we’re going to be receiving that information in quite an unstructured way.” – Katie Lennon
New technology is improving data extraction, ingestion and organisation as we covered in our Data Extraction and Ingestion: The 40 Companies to Watch in 2021 report. Whilst having a consistent standard across the industry for receiving this information would be beneficial, there is a large opportunity for third parties to provide solutions to insurers.
InsTech’s latest report, Climate Change Risk Regulation and Measurement, has been designed to inform readers about the opportunities and challenges in reporting insurers’ climate change risk and impact – it’s available to download here.