New research from ICMIF Supporting Member Gallagher Re’s Climate and ESG Centre of Excellence has led to the creation of a carbon portfolio benchmarking tool to help underwriters identify hot spots of high carbon emissions within specific geographical regions and industry sectors.
Gallagher Re notes that, while overall greenhouse gas (GHG) emissions in Europe dropped by 32% between 1990 and 2020, the post-pandemic rebound of 2021 saw emissions rise above previous 2020 levels again. However, as industries and supply chains reboot, EU member states are now targeting more ambitious reductions of 55% by 2030.
With that said, in recent years, the financial sector has taken a lead role when it comes to decarbonisation efforts through environmental, social and governance (ESG) initiatives such as the creation of the Task Force on Climate-Related Financial Disclosures (TCFD), as well as increasing regulation through Article 173 of the French Energy Transition Law and the Bank of England’s supervisory statement.
The consequent impact of such measures, says Gallagher Re, creates a pressing need for underwriters and exposure managers within the reinsurance industry to better understand the carbon footprint of companies within their respective portfolios.
Research undertaken by Gallagher Re’s in-house Climate and ESG team has resulted in the creation of a new carbon benchmarking tool. Yingzhen Chuang, Head of Climate and ESG Strategy and Execution, stated: “The tool comes at a much-needed time, with stakeholders increasingly interested in understanding a firm’s ESG impact. Reinsurers are starting to enquire about ESG for upcoming renewals, and regulators are beginning to mandate disclosure of climate change risk in financial portfolios.”
The work provides a timely addition to reinsurance brokers’ service offerings as, over the last seven years, 2,000 climate change-related legal cases have been filed against companies – a quarter of which have been raised within the last year alone. While the impact of the Russian-Ukrainian War poses further challenges for companies to transition given soaring energy costs, recent precedent in European law courts has also exposed the growing commercial liability that high-carbon-emitting industries may face to direct legal actions, this latter risk having a direct impact on liability insurance.
A key facet of the Gallagher Re carbon tool is that it allows underwriters to identify carbon-intensive risks, as well as accumulations of high emissions so that immediate underwriting actions can be implemented. Similarly, the benchmarking capability offered by the tool provides immediate feedback on the performance of a portfolio’s carbon footprint against others in the market — allowing them to gauge their proportional exposure compared to the industry average.
The development of the tool has its foundation in the principles outlined in recent chief risk officer (CRO) guidance whereby TCFD Scope 3 submissions are advised to make use of weighted-average carbon intensity (WACI) approaches — a process focused on representing emissions relative to a company’s revenue/value. Total GHG emissions owned by the portfolio are then normalised to be comparable across companies, sectors and other portfolios.
Gallagher Re’s tool is able to take standard catastrophe model exposure input file formats and classify industry sectors to indexed carbon scores, in part weighted by each risk’s contribution to total sums insured for a more realistic representation of the portfolio’s actual carbon footprint. Data used in the research comes from a variety of sources used to document CO2 emissions by specific industry sectors.
The carbon benchmarking tool allows Gallagher Re’s clients to visualise portfolio CO2 emissions by activity at a range of granularities (depending on data availability and quality). Moreover, classifying carbon production by industry sector was done in line with the EU taxonomies and other international classification systems that underpin carbon scoring methods.
Deploying the new tool, it is also possible to visualise the percentage of portfolio risk locations that have been calculated as having a low to very high carbon score grade and the extent to which these locations contribute to the portfolio’s overall carbon score.
This might illustrate, for example, how the carbon profile of a European carrier may be markedly different from the industry average. Or the tool could show the disproportionate impact that high-carbon-emitting industries have on diversified exposures. For example, a cedant’s portfolio may have just 2% of their locations graded as very high risk in terms of emissions, yet these locations contribute around 96% to their overall portfolio carbon score. Moreover, when comparing this carbon profile to that of another large European carrier, the tool identifies that the industry sectors with the highest carbon scores are those classified as petrochemical (40%), electrical (18%) and agriculture (11%). For examples and charts illustrating this, please click here.
Furthermore, the tool maps out where exactly these drivers are geographically located by country, region or CRESTA zone (Catastrophe Risk Evaluation and Standardising Target Accumulations). Therefore, Gallagher Re’s carbon tool gives insurers the flexibility to drill down into their portfolio carbon analytics in a way that enables them to gain insight into the locations that matter the most to them in terms of their respective decarbonisation strategies.
For more information about the carbon portfolio benchmarking tool or the wider services offered by the Global Climate and ESG Centre of Excellence, please contact Gallagher Re.
The Gallagher Research Centre (GRC) is a dedicated fund for collaboration between academics and the reinsurance industry. It provides access to independent peer-reviewed academic work to support applied innovations across all Gallagher Re’s advisory and transactional products related to both natural and man-made perils.
