The insurance sector is being compelled to reconsider risk—and opportunity—as 2024 sets yet another record for losses brought on by climate-related calamities. One thing is certain: decarbonization is an economic necessity as well as an environmental obligation.
Thankfully, an increasing amount of data indicates that decarbonizing portfolios is not only feasible but also profitable.
The Business Case for Climate-Forward Insurance
An unusual juncture of influence exists for insurers. They invest trillions in the world economy and underwrite risk. In other words, they have the authority and the duty to guide capital in the direction of a low-carbon future.
When done correctly, helping clients make the shift to net zero can benefit both parties:
Underwriting: Enhances connections with clients positioned for long-term success while reducing exposure to carbon-related risks and penalties.
Investments: Supporting innovative companies can preserve portfolio value and generate returns as green technology becomes more popular.
Indeed, 93% of investors now think that during the next five years, climate challenges will have a significant impact on financial performance. Credit downgrades are a concern for businesses that do not change. “Green stars”—those who take action early—may do better.
Introducing GreenFInT: An Innovative Decarbonization Tool
Accenture has created the Green Financial Institution Tool (GreenFInT), sometimes referred to as the Profitable Portfolio Decarbonization Tool, to assist insurers in making an informed decarbonization decision.
This robust tool assists insurers in estimating the effects of their customers’ and investors’ climate transition plans on emissions and financial performance across a range of climate scenarios, from “business as usual” to a 1.5°C route aligned with Paris.
It aims to close the gap between economic results and sustainability objectives by offering information that supports:
Regulatory reporting, such as ESRS E1 KPIs and CARD
Monitoring of emissions (Scope 3, Category 15)
Risk management for a portfolio
Decisions about capital allocation
Assessments of business cases
The Tool’s Operation
GreenFInT uses climate scenarios to anticipate performance over time after analyzing companies’ technology mixes and transition strategies (such as renewables vs. fossil fuels). This demonstrates:
Needs for capital expenditures
Differences in operational costs
Curves of long-term profitability
A “green star” utility business, for instance, might make significant upfront investments in renewable energy, resulting in significant capital expenditures. However, they eventually gain from increased electricity prices and decreased operating costs, which improves their resilience and margins.
A “climate laggard,” on the other hand, could be able to forgo the early investment but end up performing poorly due to growing expenses and regulatory risks.
The Business Case: Over Time, Green Stars Perform Better
We discovered the following after modeling a sample portfolio of 40 high-carbon European businesses using GreenFInT (across power, steel, real estate, and automotive):
Laggards may outperform by about 6% on the EBT margin through 2030.
However, green stars perform 30–40 percentage points better between 2023 and 2050.
This long-term perspective is essential. All too frequently, short-term outlooks—what the Bank of England refers to as the “tragedy of the horizon”—restrict decision-making. Insurers can see further ahead and make more informed, scientific decisions now with the help of tools like GreenFInT.
Why It is Time to Take Action
Change is nothing new to the insurance sector. It has survived financial crises, pandemics, and wars. The climate crisis is no exception; it necessitates a calculated, proactive approach.
Incorporating climate transition data into investment and underwriting choices allows insurers to:
Reduce long-term danger
Fulfill the growing expectations of regulations
Prevent greenwashing from harming your reputation.
Gain the confidence of investors and clients.
Open up fresh avenues for development
GreenFInT helps you create a better portfolio in addition to measuring emissions.
The Way Ahead
Insurance companies that lead the way in decarbonization will be in the greatest position for future success as regulators, shareholders, and society at large have higher expectations. The equipment is available. There is a compelling business case. And now is the moment to take action.
Do you want to know how to implement successful portfolio decarbonization techniques in your company? To begin your transformation journey right now, get in contact with Accenture’s sustainability and insurance specialists
