AXA committed to developing an energy policy this year, and now it needs to decide whether to rule out all cover for new oil and gas projects. The French insurer’s upcoming policy is a test on whether we can trust the voluntary efforts of corporate social responsibility to address climate risks or whether we need strengthened prudential regulation to achieve this goal.
The science is clear: the International Energy Agency and the Production Gap report have confirmed in recent days that we cannot afford to build any new oil and gas projects, but need to start reducing the production of these fossil fuels if we want to limit global warming to 1.5°C.
AXA has positioned itself as a climate leader within the corporate sector and has said that “our mindset must evolve faster than climate change and our response must be in line with the scale of the risk ahead”. You would expect that a self-proclaimed climate leader would jump at the opportunity to align its underwriting with a 1.5°C pathway.
The French insurer may be concerned that it will lose business to competitors if it stops insuring new oil and gas projects. It is worth noting that this is not primarily what happened after AXA stopped insuring new coal projects in 2017. By the end of the following year, its main competitors Allianz, Generali and Zurich had adopted coal exit policies as well. By now 33 major insurers have restricted their cover for coal and the market has shrunk. “Restricting underwriting for coal was a pioneering move in 2017 but has become rather mainstream today”, AXA’s CEO Thomas Buberl recently confirmed.
A few unscrupulous companies have admittedly identified a niche in profiting from the climate action which more responsible insurers are taking. When AXA acquired XL Catlin, a major fossil fuel insurer, in 2018, it forced the company to follow group policy and stop insuring new coal projects. Stephen Catlin, one of the founders of XL Catlin, soon created another insurer in Convex and started insuring some of the coal business which AXA had given up. Convex staff are “absolutely energized”, Stephen Catlin recently gushed, “knowing that senior management has been at the coalface to understand how it works”.
The experience with AXA’s coal exit policy shows that credibility has a price and climate leaders may lose some business to competitors operating without any moral compass. But climate leadership has become a sign of smart management overall, and the decisive action AXA has taken on coal has also strengthened its appeal with current and future employees, customers and shareholders.
If individual efforts for the common good are too costly, insurance companies can try to coordinate climate action amongst themselves. It is no coincidence that AXA initiated the creation of a Net-Zero Insurance Alliance (NZIA) in late 2020. Yet insurance lawyers have warned that any coordinated action which NZIA members take on underwriting fossil fuels may violate anti-trust regulations.
The NZIA has recently admitted new member companies such as Korea’s Shinhan Life Insurance which are still investing in the coal industry. If AXA, whose Renaud Guidée chairs the Alliance, decides to continue insuring new oil and gas projects, it will not only give up its own claim to climate leadership – it will also deal a heavy blow to the credibility of the NZIA.
If voluntary climate leadership and self-coordination within the industry don’t work, regulators need to step in and defend the public good. As Finance Watch has argued, prudential frameworks such as Solvency II should to be strengthened to address the risk of climate inaction and require insurers to set aside more capital to offset the risks of their fossil fuel business. The cash-flow projections for insurance obligations arising from cover for new fossil fuel production should assume a full loss and the time value of money used for these insurance obligations should be reduced to zero.
Insurance companies hate such regulatory requirements. In a letter to the European Commission the Pan-European Insurance Forum, which AXA chaired at the time, opposed the “introduction of ‘green supporting’ or ‘brown penalizing’ factors”, arguing they could lead to “unintended consequences” such as bubbles in green investments.
AXA still has a choice. If it wants to avoid a push for stronger regulation, it can show that self-regulation works, rule out support for any new fossil fuel developments in its upcoming oil and gas policy and initiate a new shift towards a 1.5°C pathway in the insurance industry.