21 November 2017

Insurance giant Allianz on 'inserting ESG into its DNA'

[Previous versions of this article contained quotes that were incorrectly attributed to another source at Allianz. These quotes have now been removed. Environmental Finance apologises for any confusion]

Allianz has divested from coal companies but has come under fire for continuing to insure the sector. Nick Roumpis reports

Allianz is intensifying its efforts to integrate environmental, social and governance (ESG) factors on both sides of its balance sheet, an executive of the company has explained.

The Germany-based firm is one of the big beasts of the insurance sector – it is in the top three global property and casualty insurers, and the top five life/health businesses.

As the owner of Pimco and Allianz Global Investors, it is also in the top five biggest asset managers, with around €1.9 trillion ($2.23 trillion) of assets under management as of the end of 2016.

The company claims to take ESG increasingly seriously. It is a signatory to the Principles for Responsible Investment, the Principles for Sustainable Insurance, and launched its ESG board in 2012, which drives its focus on the low-carbon economy and social inclusion.

Michael Bruch, head of emerging trends/ESG business services at Allianz Global Corporate & Specialty, told Environmental Finance's inaugural Insurance and Climate Risk conference in London: "There is no specific date to say now it's fine to integrate [but] Allianz is one of the largest insurers and what we are currently doing is to help our clients to quantify ESG risks and to mitigate those risks.

"On the investment side, we are focusing on proactively investing in good performing companies."

Allianz has invested $4.6 billion in renewable energy sector, particularly in wind and solar energy, making it the biggest investor in renewables globally.

It also announced in 2015 a headline-grabbing policy to sell its holdings in coal companies and stop financing mining companies or electric utilities deriving 30% or more of their revenues from coal. But insurers such as Allianz have come under fire for continuing to underwrite coal.

A pressure group of NGOs called Unfriend Coal presented a report during the conference , in which they assessed the coal policies of insurers. Its verdict was that overall, Allianz received a thumbs-down when it comes to underwriting, a more mixed response on investment and a thumbs-up on climate leadership.

Michael BruchBruch, explained how the underwriting business integrates ESG considerations. "ESG has to be driven from top down," he said. "You don't want to invest in unsustainable businesses any more – that's why we divest.

"But everybody knows we have to live with a portion of fossil fuel-based energy supply and we have to make sure that those risks are managed in a responsible way and also to decide case-by-case if we are going to insure."

Bruch added that 40% of the world's electricity and heat is still generated by coal, and it is mainly "a national duty of each government to tackle that".

Looking at its underwriting business as a whole, Allianz has reviewed more than 500 transactions for potential ESG risks, but Bruch said this doesn't mean that every industry is under scrutiny.

Bruch said: "The underwriter has a lot of empowerment, he is doing due diligence.

"We have a strong risk focus, a very robust dedicated assessment and we are really looking on the impact side.

To address such issues from an underwriter's perspective, Allianz ESG experts regularly engage with a group of seven non-government organisations (NGOs) and other investors. Bruch noted that NGOs are now shifting from campaigning to bringing transparency on ESG risks, and increasingly function as a data provider.

"We realised that we had risks in our portfolio that we didn't understand, and reputational risk is a big portion of that."

Allianz has identified 13 sensitive business areas, including agriculture, animal testing, animal welfare, gambling, clinical trials, defence, hydro-electric power, infrastructure, mining, nuclear energy, oil and gas and the sex industry, where it sees high potential for ESG risks.

Allianz's systematic approach to integrating ESG issues throughout underwriting process.

  1. Governance: embedded in policy framework. ESG risk management embedded in relevant policies for underwriting globally.
  2. Underwriting due diligence: Underwriters across all lines of business globally undertake initial ESG due diligence to identify ESG and reputational critical issues.
  3. In-depth ESG assessments: Strong risk focus, single-case decision making.
  4. Clearly defined exclusion criteria: We do not insure clients involved with controversial weapons and apply dedicated assessment methodology for coal-based business models.
  5. Risk dialogues: Risk dialogues with clients on critical issues support informed decision making, transparency and risk mitigation.
  6. Products and services: Delivery of ESG expertise to clients via development of ESG risk coverage and consulting services.

Bruch clarified the difference between ESG and reputational risks for insurers. He said: "Putting it into a nutshell, ESG risk always has a technical component included. Pure reputational risk is clearly a question on if we want to insure controversial persons or not."

With externalities such as carbon risk becoming increasingly material for Allianz's clients, Bruch said that a future challenge would be to quantify those risks. According to Bruch, another challenge ahead for the industry is the gap between Europe-based insurers and the rest of the world. He added that brokers should be brought to the table as well.

To give a broader perspective of how Allianz approaches ESG policies, Bruch said that the board has set a target of integrating ESG into the DNA of every Allianz employee.

Regarding investments in renewable energy, Bruch noted that intervention is required to manage those assets in a proper way, and this is an area where the insurer can help.

"80% of losses can be avoided with good management performance. Giving advice to the client on how to prevent losses is extremely important," he said.

Michael Bruch