three people wearing protective clothing

Sustainability risk

Creating positive outcomes taking economic, social and environmental considerations into account

Regular review of sustainability issues

Sustainability issues are often systemic, complex and evolving so it is especially important for companies to regularly review the materiality of these issues. Materiality defines why and how certain sustainability issues are important for a company by assessing their importance to stakeholders, both internal and external. The Zurich Insurance Group (Zurich) performs a materiality review to define our strategic sustainability priorities and what matters most to us and to our stakeholders.

What are sustainability risks?

Sustainability risks are those risks associated with sustainability issues. Like global risks, they are interdependent and often have emerging risk characteristics. They are typically drivers for other risks, long-term in nature and difficult to quantify as there is great uncertainty as to how they will develop. So we use different techniques and approaches to understand and manage those risks.

They are often classified as being either environmental, social or governance (ESG) topics.

Environmental

Relates to the quality and functioning of the natural environment and systems, such as climate change, the loss of biodiversity, the disruption of ecosystems, pollution (air, water, soil) and depletion of raw materials.

Social

Relates to the rights, wellbeing and interests of people (including in the workplace) and communities, such as poverty, human rights violations, racial discrimination, gender inequality, child labor and the use of controversial weapons.

Governance

In particular, from an investment perspective, relates to the quality of governance in companies such as transparency, corporate governance, responsible tax, diversity, bribery and corruption, and ethics violations.

Double materiality – a way to view risks from different perspectives

It is clear that sustainability risks go beyond reputational risk and link to an insurer’s purpose and strategic goals. Work on sustainable finance in jurisdictions such as the EU has led to the concept of “double materiality” – the consideration of both how an insurer is affected by the risks related to a sustainability topic (often referred to as “outside-in” risks) as well as an insurer’s own impact on that issue (“inside-out” risks). This is a key feature of sustainability risks and an additional dimension we consider in our risk management practices.

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Source: Mind the Sustainability Gap – Integrating sustainability into insurance risk management


Integrating sustainability risks into the enterprise risk management framework

This integration includes the following:

  • Sustainability risk identification: The process of monitoring topics on the emerging and sustainability risk radar to identify those topics that may develop into a material risk for the Group.
  • Sustainability risk assessment: Where sustainability is a driver for other risks, responsibilities and requirements for risk assessments are defined for each major risk type (credit risk, market risk, operational risk, etc.).
    • Scenario analysis: For some sustainability risks, especially those with particularly long-term emerging risk characteristics and a high degree of uncertainty (e.g., climate change risks) a scenario-based risk analysis is used. For climate change risks, this includes identifying, assessing and monitoring potential climate change related risks and opportunities associated with a range of plausible future states over a time horizon that extends beyond the typical planning window. It is deployed at Group level to support strategic and risk management responses, and the outcomes are disclosed in our Integrated Sustainability Disclosure (ISD) in the Group’s Annual Report. This follows the recommended frameworks of the Taskforce for Climate Related Financial Disclosures (TCFD).
    • Risk response: Sustainability risks that have been identified and prioritized will often have risk positions, which explain Zurich’s appetite for these risks, as well as sustainability risk briefings that are put into practice by businesses and functions to manage the risks appropriately.
    • Risk monitoring and reporting: Support is available from experts across the Group and escalation follows normal governance procedures. We track and analyze the outcome of the risk assessment and risk mitigation efforts.

Integrating sustainability risks into investment, underwriting and operations

Zurich’s general approach

Zurich supports actions, behaviors or activities that are consistent with the purpose, values and strategy of the Group.

  • Zurich takes underwriting and investment decisions aligned with Zurich’s purpose, values and strategy.
  • When Zurich enters into external commitments, it does so after due consideration of potential business implications and takes appropriate steps to deliver on these commitments to safeguard against possible risks to its reputation.
  • Zurich has policies in place that define the business activities for which the company has no underwriting or investment appetite.

We integrate all of our commitments in our underwriting and business decisions.

We have specific positions on the following:

Our stakeholders and society in general are rightly concerned about the production, sale and use of banned cluster munitions and anti-personnel land mines. They cause immeasurable suffering and hold back countries’ post-conflict development through injury and death to children and agricultural workers who accidentally pick up or step-on unexploded ordnance. It also exposes customers and us to a loss of trust with stakeholders as well as reputational damage.

Although cluster munitions and landmines are now banned by international treaty, there are some hundreds of millions either in use or available for use. Banned cluster munitions and landmines continue to maim or kill people around the world every day. The bans have been enacted because these weapons often inflict cruel, arbitrary punishment on people. Somewhere between 10-40 percent of these munitions fail to explode on impact. Moreover, their deployment is often inaccurate, with large numbers of them in non-military zones where civilians live and work. They tend to go off accidentally, when disturbed by ordinary activities such as farming, building, transport or even just walking. This infestation makes vast areas of valuable land off-limits, destroying livelihoods. Communities can be affected for decades after the end of an armed conflict.

Zurich will not enter into new business relationships with companies that produce, stockpile, distribute, market, or sell banned cluster munitions or anti-personnel landmines. If we become aware of potential involvement of an existing customer or investee company in such activities, we will engage in a maximum two-year dialogue to explain our position on this sustainability issue and expect compliance with the relevant international treaties. During that period, Zurich will neither quote new business nor increase its direct investments. Zurich will stop business dealings in a phased way if a customer has not committed to stopping the activity after one year, where permissible by law or regulation. Business dealings include the provision of insurance products and services and direct investments.

Coal, oil sands and oil shales

Overall progress towards the Paris Agreement goals is slow and all pathways analyzed in the IPCC’s 1.5 degrees report published in October 20181 and the International Energy Agency (IEA) Net Zero by 20502 (NZE2050) scenario require a “steep reduction” in the use of fossil fuels. Limiting average temperature increases to 1.5°C rather than 2°C will result in “robust differences” in terms of fewer and less intense severe weather events such as droughts, floods and wildfires. It will also reduce impacts on sea level rise, species loss and extinction, public health and livelihoods, water and food security and economic growth.3 These are all important impacts, not only for society, but for insurers as we support our customers’ and society to manage climate risks.

The most carbon-intense fossil fuels (coal, oils sands and oil shales) create a particular challenge for global greenhouse gas emissions and that is why Zurich has focused on reducing our exposure to these fossil fuels in particular.

Given this situation, where permissible by law or regulation, Zurich will not insure or invest in companies that:

  • generate more than 30% of their revenue from mining thermal coal, or produce more than 20 million tons of thermal coal per year;
  • generate more than 30% of their electricity from coal;
  • are in the process of developing any new thermal coal mining, power or transportation infrastructure; Zurich will also not underwrite any new metallurgical coal mining*
  • generate at least 30% of their revenue directly from the extraction of oil from oil sands;
  • are purpose-built (or “dedicated”) transportation infrastructure operators for thermal coal or oil sands products, including pipelines and railway transportation;
  • generate more than 30% of their revenue from mining oil shale, or generate more than 30% of their electricity from oil shale.

*Enhancement to existing position, which is in the course of being fully embedded within our underwriting process.

While the implementation of the policy for our existing portfolio is completed, we continue to screen new clients and investee companies and will only consider companies that are already below those limits or have near-term commitments in place to bring them below the limits, with annual reviews of progress. If in the course of these dialogues the company does not show credible progress in their transition from thermal coal, oil sands or oil shale, Zurich will, as permissible by law or regulation, reduce exposure, divest from equity holdings, stop investing in new debt and run-off existing holdings.

These positions do not apply to workers’ compensation, other employee protections, or considerations, which have a positive impact on human health and the environment. It also does not affect green bonds that support the transition.

On thermal coal, in our investment management activities, we also engage with companies on the phase out of thermal coal production and use in Organisation for Economic Co-operation and Development (OECD) countries and EU 27 by 2030 and rest of world by 2040.4 Where permissible by law or regulation, Zurich will phase out insurance for companies that mine or transport thermal coal, or generate electricity from thermal coal by 2030 for OECD and EU27 countries and 2040 for the rest of the world.

Oil & Gas

Whilst Zurich recognizes the present role of fossil fuels, our support is prioritized for companies actively transitioning to low carbon business models. Zurich does not believe that further exploration and development of new fossil fuel projects, beyond those already operating or with approved licenses already in place, is required for the transition. Hence, Zurich has implemented positions for its investment and underwriting portfolios to restrict support of new fossil fuel developments.

For insurance, to the extent permissible under law or regulation, we exclude the following from our activities:

  • New single-site P&C insurance policies for new (upstream) oil and gas exploration and development projects, for sites where licenses were approved after 31 December 2022.
  • Oil and gas drilling and production projects and infrastructure (up and mid-stream*) in the Arctic5

Within our insurance offering, we also expect oil and gas producers to have a “zero routine flaring by 2030” commitments and have credible transition plans aligned to achieving net-zero by 2050, with interim targets and clear measurable commitments.* Those transition plans should be in place by 2030. As a last resort, where permissible by law or regulation, we will then exit customers where transition risks are not sufficiently managed. These positions do not apply to workers’ compensation, other employee protections, or considerations, which have a positive impact on human health and the environment.

*Enhancement to existing position, which is in the course of being fully embedded within our underwriting process.

For Zurich’s investments in private debt6, we have dedicated fossil fuel guidelines agreed with our asset managers. In line with the group wide guidelines, Zurich excludes any thermal coal related assets in these portfolios. Further, these portfolios will not finance oil and gas assets which are not aligned with science-based or government-issued regional/ national 1.5°C pathways.

Zurich’s fossil fuel guidelines for private debt investments

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1 https://www.ipcc.ch/sr15/
2 https://www.iea.org/reports/net-zero-by-2050?utm_campaign=IEA%20newsletters&utm_source=SendGrid&utm_medium=Email
3 UNEP Emissions Gap Report 2022 https://www.unep.org/resources/emissions-gap-report-2022
4 For more information, please see https://climateanalytics.org/media/report_coal_phase_out_2019.pdf
5 Considered as anything north of 66 degrees latitude with the exception of the Norwegian Continental Shelf
6 Excluding CLOs and Real Estate

Sustainability risk in underwriting

Society is facing increasingly interconnected and complex challenges. The insurance industry cannot be a bystander and where appropriate, it must play its role in addressing these challenges as a manager of risk. Failing to do so can have a damaging effect on society, stakeholder trust and the reputation of the insurance industry and its customers. That is why we work with our corporate customers and brokers to better manage sustainability risks and strive to promote best practices.

We believe it is better to engage with customers to understand their business and operations and work together to ensure that responsible and sustainable practices are in place. This enables us to make better-informed decisions on how we can support customers in developing best practices.

We also provide guidance and training for underwriters and other relevant stakeholder groups and have established sustainability risk assessment and referral processes.

Zurich tracks and monitors volumes and types of sustainability risks in business transactions internally within the Group. Significant changes in sustainability performance can be monitored and assessed accordingly.

In addition to the positions followed by the Group described above, we pay special attention to the following areas of concern in underwriting:

As per our signing of the UN Global Compact, our approach to managing sustainability risks in business transactions has a particular focus on transactions where the insured customer may have an established track record of human rights violations. Human rights issues that are considered under our policy are:

  • Child labor
  • Forced labor and compulsory labor
  • Involuntary relocation of local communities, inappropriate use of force or adverse impacts on vulnerable indigenous people. Evidence of such violations can include, but is not limited to, the absence of right of free, prior and informed consent for Indigenous Peoples (FPIC).
  • Poor health and safety conditions
  • Instances of bribery and corruption

While important for the world’s continued economic development, the construction of hydroelectric dams, mining projects and oil and gas production can have significant negative environmental or social impacts if they are not planned and executed in accordance with international best practices. Where providing insurance for such projects, we pay special attention to:

  • human rights abuses, such as relocation of local communities without due process (including absence of free, prior and informed consent (FPIC))
  • potential environmental impacts and if operations are located within protected areas

Dam construction: Dams help communities and economies manage water resources for food production, energy generation, flood alleviation and domestic and industrial use. But they can also displace communities, cause adverse environmental impacts and create political risks including the inequitable distribution of benefits.

Mining: Mining provides minerals and metals that underpin economic growth and social welfare. If not managed responsibly, mining operations can have adverse impacts on the environment, host communities and countries.

Oil and gas: The main points are described in the Group’s fossil fuel position included above in the section “Zurich’s general approach”.

Responsible investment, ESG integration and impact investing

We believe that proactively integrating sustainability risks and opportunities in our investment decisions will help us to do our job well on a long-term basis (ESG integration). ESG integration – across asset classes, and alongside traditional financial metrics and state-of-the-art risk management practices – helps us to achieve superior risk-adjusted, long-term financial returns. At Zurich, we define ESG integration along four basic requirements: training; data; investment process; and active ownership. These four requirements not only help us to integrate ESG factors in the investment decisions, but also to understand and monitor where we or our asset managers stand in terms of capabilities.

Read more about investing responsibly 

Sustainability risk in operations

Due to the nature of our business, we are predominantly consumers of services and not products or raw materials. Compared with other industry sectors such as manufacturing, the risks associated with the ESG impact of Zurich’s supply chain are low. Nonetheless, we are committed to effectively managing such issues. We have developed a third-party governance framework (TPGF), which provides a framework of minimum standards that apply to the onboarding and management of third parties with which we work, including suppliers. The TPGF adopts a risk-based approach to establish onboarding and management measures, such as third-party due diligence processes, that are relevant and proportionate to the nature and risk of any particular transaction. We consider supplier alignment with our Supplier Code of Conduct (SCOC) as part of our due diligence processes and request selected suppliers to complete a self-assessment. We have a referral process in place to investigate or resolve, as appropriate, any red flags identified during the due diligence process. We also use a software tool that uses artificial intelligence to screen news reports, social media posts and NGO reports to monitor potential ESG-related supply chain issues. We additionally seek to include specific provisions within our supplier contracts requiring suppliers to embrace ethical business practices. From time to time, we may conduct audits or follow-up reviews on these topics with our suppliers.

Read more about sustainable sourcing