Biodiversity: It’s Time to Protect Our Only Home - N°5 Managing Biodiversity in the Insurance Sector

Based on our engagement sample, the insurance sector demonstrates a mixed bag of awareness on the topic of biodiversity¹. Some of the insurers are taking the subject of biodiversity very seriously, and have announced a specific biodiversity strategy and/or devoted significant resources to initiatives and research on the topic. On the other hand, some of the companies were surprised and uncomfortable by our enquiry as biodiversity is not yet on their radar screen. These insurers appeared unfamiliar with the subject and how it pertains to the sector specifically.

We noted that most of the insurers have started to indirectly take biodiversity risks and impacts into account through its strong links with climate change, but not through a direct assessment of the risk and impact. In the case that insurers do directly asses the topic, they first start to approach biodiversity for their investment portfolio (assets), before considering it for the underwriting activities (liabilities) – as they do for climate. We also note that the industry‘s primary focus on biodiversity is a risk approach, more than an approach of impact, dependencies or opportunities. The nature of the industry as a risk manager and risk carrier explains this tendency.

Biodiversity as a stand-alone risk and opportunity, instead of linked to climate

Several insurers mentioned indirectly taking biodiversity risks into account through its strong links with climate change instead of through a direct assessment of the risk. By contrast, we would recommend companies to start identifying more directly, and acting on the risks and impacts of biodiversity.

At the same time, the industry can rely on the progress that has been made on climate. Several insurers mentioned that the climate agenda has brought them valuable lessons, which they are now able to leverage upon for the topic of biodiversity, including the TCFD disclosure framework.

More and more tools are becoming available for the industry to start measuring nature-related risks. The ENCORE tool, for example, broadly maps impacts at a sector and sub-sector level. The quality of data and its application still leaves room for improvement. One insurer mentioned to us that it currently uses ENCORE to serve only two primary objectives: to comply with regulation and to invigorate awareness.

Many companies in a variety of sectors are also using the IBAT (Integrated Biodiversity Assessment Tool) to get a sense of where they operate and if they are near protected or high risk areas. The insurance industry uses it for due diligence of underwriting and of alternative asset investments, but there could be opportunities later on, to integrate the data into a wider range of investment strategies.

Additionally, several insurers mentioned the application of exclusions or due diligence on the basis of data from the IUCN Red List of Threatened Species, the Ramsar Convention, UNESCO World Heritage Sites, IPBES and Iceberg Data Lab.

What is still missing, is the quantitative measurement of financial companies’ impacts. This is arguably a difficult feat, considering that there is no ‘simple’ KPI like CO2. Some insurance companies are actively involved in major working groups such as the TNFD and the Finance for Biodiversity Pledge to collectively determine how to address this issue.

We support these initiatives but also encourage companies to personally trial certain KPIs and tactics to measure nature-related impacts across portfolios. New tools are emerging for the financial sphere including Iceberg Data Lab and the Global Biodiversity Score. As awareness of the issue improves, data availability is likely to follow.

Still, it remains difficult for a financial company to measure its impact on specific species. On the other hand, it is easier to identify the drivers that negatively impact biodiversity and to look at what the company does in that respect. As is the case for other sectors, there are KPIs available that have links to the drivers of biodiversity loss such as CO2 emissions, toxic waste and pollution intensity. Related to that point, one insurer rightly stated to us that biodiversity can take care of itself! In the first place, it is more about reducing the negative impact instead of creating a positive impact. It is therefore essential to first start reducing the negative footprint of a company (whether through CO2 emissions, toxic waste and/or pollution intensity).

Looking more closely at an insurer’s investments, we get the same picture. Only a small part of the portfolio concerns biodiversity-positive activities and services, such as green infrastructure. The vast majority of the portfolio refers to ways how issuers can decrease their negative impact.

We are aware of a best-in-class insurer (which was not part of our sample for this engagement) that has started to calculate its biodiversity footprint on a small part of its investment portfolio (corporate bonds and concerning the most harmful sectors only for the time being). The insurer is expanding the scope over time. This player mentioned still staying far away from being able to pilot the investment portfolio according to biodiversity risks and impacts. However, the information gathered allows it to target its engagement activities.

Compared to other sectors we examined, insurance is making the most strides, through the efforts of a few players, on measuring risk exposure linked to biodiversity. This is of course inherent to the nature of their business as risk managers and risk carriers. One insurance company even has developed a commercial tool to assess sector reliance on nature, and geographic  exposure  to  ecosystem  decline.

This work will not only help the industry and individual insurers to better address nature- related loss but could also provide guidance to corporates within their portfolio to better take into account biodiversity. We see the work of the leading companies as particularly innovative.

Companies with the strongest practices have identified biodiversity as a(n emerging) risk. One company in particular has specifically identified biodiversity within its risk framework, which is translated, among others, into nature-related sector policies.

The presence of sector policies ‘automatically’ addresses biodiversity from a risk as well as an impact perspective. We believe this to be the first major step to be taken for an insurer when adopting a meaningful biodiversity strategy. The implementation of biodiversity- related sector policies (for example on forestry, pulp & paper, palm oil, hydroelectric dams, thermal coal, oil & gas) should be applied to the investment and underwriting portfolios as well as the sourcing activities.

There is a long way to go to precisely price biodiversity into risk management processes. Still, a specific nature-related risk, the risk of a pandemic, has now been integrated into risk management by the industry. Insurers have either excluded this risk from their policies (travel, business interruption, workers compensation insurance), or the inclusion of pandemic risk has led to higher premium rates.

One insurer rightly stated that nature-related risks need collective action, as we are talking here about systemic risks. Insurers, part of the broader financial sector, play a key role in helping industries like agriculture, infrastructure and energy to transition. But insurers also cited the help that is needed from the public sector.

For example in the form of blended finance instruments to attract capital to emerging markets, where many of the biodiversity hot spots reside. Additionally, there is an increasing call for governments to remove subsidies on polluting activities.

There is quite an offering of tools available for the sector to start identifying its exposure to nature-related risks. As cited higher up, these tools concern for the time being primarily the investment portfolio of insurers, and to a lesser extent the liability exposure. New tools have emerged for the financial sphere such as CDC Biodiversité’s Global Biodiversity Score (GBS), which also has potential applications in other sectors³. Still, some insurers rightly cited the shortage of quality nature-related data and the need for further disclosure by data providers.

In terms of collaborative initiatives, there is equally a choice available as seen in the table above. Some were cited by companies within the engagement pool but additional initiatives also exist in the market, but were not mentioned during our meetings (*table above). Several players however signaled their hesitance to allocate precious resources to an initiative that might not turn out to become market-leading over time. Once the sector becomes more conscious of the risks it runs, the willingness to invest in these initiatives might increase – if we can wait that long!

Overall, as is the case for climate, insurers first start to approach the topic of biodiversity for their investment portfolio (assets), before considering it for the underwriting activities (liabilities). There are several reasons for this order of implementation. Firstly, regulation is more coercive for the investment side, for example in France through Article 29 of the law on Energy and Climate, which requires financial institutions to disclose biodiversity-related risks. Secondly, a large part of assets (public equity and bonds) are easily identifiable (through ISINs for example), which is not the case for activities or risks under insurance coverage. Thirdly, while it is relatively straightforward to get the data for the investment portfolio (through external providers), it is considerably more difficult to get information on exposure (to biodiversity, climate or other) through insurance contracts. Finally, it is easier to coerce pressure on investee companies on the topic of biodiversity, using the stick of divestment than it is to influence insurance clients, as these are often longer term and tighter relationships.

This article is part of the series “Biodiversity: it’s time to Protect our Only Home”. To learn more about this theme, please click below on the following article.

¹ This report was written in 2022, based on engagements that took place in 2021.
² Observation is based off of sources including ENCORE, BCG, engagement calls, and analyst assessments.
https://encore.naturalcapital.finance/en
https://www.bcg.com/fr-fr/publications/2021/biodiversity-loss-business-implications-responses
³ The GBS is used by Solvay and Schneider Electric for instance.
⁴ Comments as of October 2022.