Throughout history, insurers have been instrumental in driving social change, enabling human progress, innovation and prosperity. From seat belts to vaccines to fire retardant materials, insurers have promoted numerous innovations. Today they face a new monumental challenge: climate change. 2024 was another record year of losses for insurers caused by natural disasters related to climate change. Insurers are therefore looking for greener pastures. When done right, it is beneficial for insurers to help companies transform to reduce greenhouse gas emissions. They can facilitate the transition to a carbon-neutral future by exerting influence across the wide range of industries they finance.
There is an opportunity for insurers to protect their revenue and profits while supporting customers on their journey to net zero. In underwriting, this minimizes the risk and scope for regulatory fines by proactively responding to changes. Customers who effectively address the green transition are expected to achieve higher sales in the medium to long term. The case is even better understood in investments: 93% of investors say climate issues are most likely to impact investment performance over the next two to five years. Companies that fail to transition or start transitioning too late risk losing their investment grade credit rating, while outperformers – the so-called “green stars” – are expected to benefit from the transition to green technologies in a global scenario in line with the Paris Agreement.
A new tool for profitable portfolio decarbonization
Insurers must be able to translate the emissions reduction measures of their investees and customers into financial impact for appropriate risk calculations in order to achieve profitable decarbonization on their own side.
Because we at Accenture are committed to promoting net zero business practices, we introduced this GreenFINT (Green Financial Institution Tool), also known as Profitable Portfolio Decarbonization Tool. Comparing the dynamics of sample customer portfolios up to 2050 for sectors with high CO2 intensity shows that “green stars” could outperform “climate laggards” by 30-40 percentage points. The true value of the tool lies in familiarizing insurance managers with investment, risk and pricing issues and setting assumptions for different worldviews, from a “hot world” scenario to achieving Paris alignment.
Allow me to go into more detail about the tool. The GreenFInT tool is suitable for both emissions measurement and reporting use cases (e.g. ESRS E1 quantitative KPIs for CSRD) and business value cases related to decarbonization. The tool applies climate scenarios (e.g. 1.5°C, 2.4°C) to portfolio companies’ technology mix, depending on their net zero commitments and transition plans. Differences in technology mix, commitments and plans lead to different profitability curves via required capital investments and differences in operating costs.
“Green stars” prevail in the long term
To illustrate, the “Green Star” customer of a power generation insurer with an SBTi verified net zero target by 2040 has and will have a greater share of renewable energy than a customer classified as a “laggard”. With its proactive transition to net zero, the Green Star customer has an initial high capital cost to finance the expansion of installed renewable energy capacity to achieve its milestones, while electricity prices are relatively high – presenting a business opportunity for insurers as the customer requires financing and insurance of the expanded renewable energy. In comparison, a “laggard” company has not had, and will not in the future, make any capital investments beyond the usual replacement and maintenance costs of its power plants. On the other hand, renewable energies have significantly lower operating costs compared to electricity from nuclear energy and natural gas. Thus, the “green star” that has invested in renewable energy in a timely manner will benefit from lower operating costs, while the “laggard” will have higher operating costs from traditional energy sources.
Let’s take an example insurance portfolio with 40 large corporate customers from four high-intensity sectors, namely power generation, steel, real estate and automotive, with a focus on Europe. In a 1.5°C scenario, the capital requirement for these companies’ net zero transition is around $650 billion 2023-2050 – according to GreenFInT modeling. While in the medium term up to 2030 the EBT margin of the “laggards” exceeds that of the “green stars” by around 6 percentage points, in the long term (2023-2050) the “green stars” outperform the “laggards” by 30-40 percentage points (see graphic below).
This forward-looking approach – using scientific carbon budgets versus traditional historical-based forecasts – allows insurers to integrate long-term scenarios (out to 2050) into their current thinking. This is an extremely important step in breaking through the “tragedy of the horizon.” GreenFInT makes it possible to identify investees and customers of insurers with trusted net zero commitments, as the business case assessment can reveal who may not be able to afford their net zero commitments. Building a trusting relationship with these companies as an insurer or investor is now the key to profitable decarbonization. The insights gained through GreenFInT can help prioritize the customers they want to engage with and provide an informed conversation starter to better understand customers’ transition plans.
Beyond a net zero business case analysis, GreenFInT also includes accounting for Category 15 Scope 3 emissions in absolute numbers and physical intensities, as well as target setting and a “what if” function that allows insurers to simulate impacts on their carbon footprint through adjustments to their portfolio.
The time to act is now
Insurance has consistently demonstrated resilience in the face of numerous challenges, and the current push for decarbonization is no different. By moving to net zero, insurers can not only secure their profitability, but also play a crucial role in supporting a sustainable future. Integrating science-based sustainability goals into underwriting and investment practices will enable insurers to drive meaningful change across diverse industries. As regulatory pressure and public expectations continue to rise, insurers must act decisively to avoid the risk of inaction and greenwashing. The tools and strategies described provide insurers with a clear path to profitably decarbonizing their portfolio, ensuring long-term growth and confidence in a rapidly evolving landscape. Now is the time to act, and the opportunities for those who lead this are enormous. You can find more information about implementing these strategies in your company here Get in touch.
