Swiss Re’s Veronica Assandri Foldnes, Global Head of Commodity Finance, and Lasse Wallquist, Head of Sustainability Corporate Solutions, discuss ESG opportunities and challenges in the commodity sector as well as for Swiss Re as a whole.
Q: The ESG focus is reshaping the business world. What is currently driving ESG considerations? Is it a pure regulatory and compliance topic for Swiss Re or rather a business aspect?
Wallquist: It’s both as it ultimately impacts many areas of our company. In a market environment, profitable business activities create economic value. Occasionally, however, they may also adversely affect the environment and certain vulnerable groups, even though in compliance with all legal and regulatory requirements. If such impacts are ignored, the transactions may pose a threat to societies’ long-term sustainable development. We consider ESG issues in our risk management to identify, assess and tackle potentially negative effects of our transactions on local communities, workforces and the environment. Our approach applies to all our business transactions in re/insurance as well as investments, to the extent that we have information granularity available which allows for a meaningful ESG risk assessment.
Assandri Foldnes: ESG plays a key role in our strategy, driving our business proposition and product offering of the Credit & Surety team of Corporate Solutions. Looking at commodity finance specifically, we focus on supporting the energy transition by assisting our clients in their financing of companies and projects aligned with such transition.
In this respect, credit insurance solutions help our clients steer their capital efficiently while considering ESG issues.
I would say that this willingness to support the energy transition holds in general at Swiss Re. We work with our clients, partners and governments in supporting their actions to mitigate the impacts of climate risks they might be exposed to and insure what cannot be mitigated. We contribute to the ongoing dialogue on relevant ESG risk topics within the re/insurance industry, including through multi-stakeholder engagements. For example, advancing the net-zero transition and the role of renewables are areas where we can provide re/insurance solutions to address underlying risks.
Our efforts in supporting the shift to a low-carbon economy are threefold:
- Sharing of risk knowledge and expertise for example around new technologies and physical climate change risks
- Absorbing risk and facilitating capital re-allocation by insuring low-emission instead of high-emission assets and thereby enhancing the risk-return profile of climate-positive projects
- Investing in the transition to net zero as long-term institutional investors.
Q: What has the commodity finance team in particular and the Swiss Re Group in general been doing regarding the transition to net zero?
Assandri Foldnes: As indicated, a priority for us in commodity finance is to support the energy transition that’s critical on our net-zero path by being a key partner to our banking clients that finance companies and projects in the industry. With our credit insurance we can help them steer their capital efficiently to where it’s most needed while considering ESG issues. We cover well-established industries like mining of energy transition materials, the battery value chain, and financing of carbon credits. And in newer sectors like hydrogen, we support not only with our credit insurance capacity but also in helping clients understand the risks better, leveraging our in-house engineering experts and research as well as strengthening new ecosystems by organising industry events that bring together key stakeholders, such as at our ‘Hydrogen as a Game Changer in Energy Transition’ conference in The Hague last fall.
Wallquist: The Swiss Re Group supports the transition to a low-carbon future and seeks to contribute to the goal of limiting global warming to 1.5°C above pre-industrial levels. We are committed to achieve net-zero emissions1 across the Swiss Re Group by 2030 in our own operations, and by 2050 in our underwriting and investment portfolios.
Swiss Re is a founding member of the Net-Zero Asset Owner Alliance as well as the Net-Zero Insurance Alliance (NZIA) and chairs the latter’s Metrics and Targets Workstream. One of the NZIA’s milestones was announced mid-January with the launch of the target-setting protocol which will assist NZIA members in setting science-based targets towards net zero. The transparent measurement and reporting of relevant metrics will allow to assess the impact of members’ climate activities and their progress over time, in turn increasing their accountability.
While we focus our decarbonisation efforts on supporting our customers in their net-zero journey, we also have specific policies for distinct sectors. For example, in line with our Oil and Gas Policy, during 2023 we will phase out our insurance and reinsurance facultative contracts with the top 10% of the world’s most carbon-intensive oil and gas companies and continue to implement the phase-out of thermal coal-related re/insurance in OECD countries by 2030, and in the rest of the world by 2040.
Q: What are the key challenges Swiss Re is currently facing with respect to the transition?
Assandri Foldnes: The commodity sector faces both challenges as well as opportunities in relation to the energy transition. On the one hand, the sector is crucial to make the energy transition to net zero feasible by providing the necessary raw materials to build the new technologies that are replacing the current fossil fuel-based industrial model. This includes everything from electric vehicle batteries to power lines, wind turbines, etc. At the same time, given the nature of raw materials extraction, there are environmental and social impacts that need to be carefully managed. These can also be exacerbated by social and governance situations in the respective countries the commodity producers operate in. Given these challenges, clear and transparent goals and investment criteria need to be set for those engaged in the financing or credit insurance of these activities.
In addition, given our position in the supply chain behind the front-row real economy as well as the second-row finance industry of our banking clients, there’s the complexity of being aligned in terms of our goals and how we measure them. Focusing on greenhouse gas emissions, scope 1, 2 and 3 of a particular company or project could likely become as important in analysing a risk and taking an investment decision in the very near future as financial metrics like EBITDA, leverage or production costs are today. However, as the ESG criteria, measurement and hurdles vary from institution to institution, this can complicate the alignment with our clients on what exactly a project contributing positively to the environment should look like. As our businesses depend on each other, these discussions are key to pave the way forward to a sustainable economy. Different ESG considerations will likely continue to co-exist and apply to different industries across different countries. However, we have to start working somewhere towards a minimum common understanding. And what is key is that we learn from each other along the way and co-operate towards a shared objective. Ultimately the goal should be that of reaching a net-zero emissions economy.
Wallquist: While our ESG considerations and objectives are by no means limited to the environmental side of addressing the risks of climate change, the net-zero transition is currently one of the aspects we’re focusing on intentionally in our ESG journey. Measuring the carbon footprint of insurance contracts remains a challenge for the insurance industry. To address this, we work with the Partnership for Carbon Accounting Financials (PCAF) in the context of the NZIA. Together, we are advancing a methodology to calculate carbon emissions associated with insurance portfolios, which aims to steer our underwriting business towards less carbon- intensive activities. At the end of 2022 the group launched the first version of a ‘Global GHG accounting and reporting standard for insurance-associated emissions’.
Q: What are Swiss Re’s next steps?
Wallquist: The efforts pursued within the context of the NZIA and PCAF brought to light that there are limitations to data availability at present and that carbon footprint estimates for re/insurance underwriting are thus marked by uncertainty. We consider it important that the challenges and uncertainties currently hampering the measurement of underwriting carbon footprints are adequately addressed going forward.
The NZIA target setting protocol outlines five target types within three target categories. As a founding NZIA member, we will be required to set at least one of the five target types by end of July 2023, and at least one target type in each of the three target categories by July 2024.
The NZIA also recently announced that the Alliance will continue to collaborate with the Science Based Targets Initiative (SBTi) on the development of its approach to target-setting for insurance and reinsurance underwriting portfolios in line with SBTi’s upcoming Financial Institution Net-Zero Standard (FINZ).
Assandri Foldnes: Our underwriting and sustainability teams are coordinating closely to help identify key sustainability issues where we have the appropriate expertise, products and services to help our clients in their efforts seeking to have a positive ESG impact.
We see the energy transition as a driver of growth for credit insurance in the commodity sector, given (1) the increased demand for commodities, (2) the requirement to invest into carbon-intense industries in order to make them less carbon emitting, as well as (3) the capital investment flowing into new industries that are emerging.
Last but not least, we know our banking clients have their own Net-Zero Banking Alliance with similar ambitions. In particular when it comes to insuring credit risks, the co-operation between banks and insurers in the development of the respective metrics and targets is important. The better aligned we are in how we measure the emissions of our portfolios, the faster we’ll all be able to progress towards our common goals and have a positive impact at scale. We’re committed to supporting the shift to a net-zero economy, so let’s join forces and continue partnering for progress on our net-zero path.
- Net-zero means that for every tonne of GHG emissions that cannot be avoided, an equivalent amount of CO2 needs to be removed from the atmosphere and stored permanently.