Risky Business
The insurance industry estimates that the floods in the UK in spring and summer 2007 cost it £3 billion. We investigate the insurance industry's ethics, and whether it's partly to blame in creating the crises it has to pay out on.
Extreme weather events, from hurricanes and typhoons to floods or droughts, are costing the insurance industry billions, resulting in raised premiums for consumers and the threat of cover being withdrawn from increasing numbers of people in areas most likely to be hit.
The performance of insurance companies on the issue of climate change demonstrates the extent to which the actions of one part of a company can exacerbate the problems being faced by another. Because while some insurance companies have been facing up to the issues of climate change for years - longer than in many other industries - the investment divisions of those same companies have been helping to fund climate change activities.
Take Legal & General Group, for instance. Like many other major investors, it has holdings in big fossil fuel companies such as Royal Dutch Shell and BP. However, it also invests heavily in a number of other oil and gas companies which are busy exploring or developing unexploited sources of fossil fuels in countries which have recently opened up to overseas interests, such as the Central Asian states of the former Soviet Union.(1) These are the smaller, riskier pioneer companies which are finding sources of climate-changing fuels to try and prop up an unsustainable way of life in the affluent nations, and which attract some fund managers because of the potential high returns - whatever the environmental cost.
Alongside these investors stands the Royal Bank of Scotland, owner of the Direct Line, Churchill and Privilege insurance names, which branded itself 'the oil and gas bank' for the support it gives the industry.
As well as helping to bankroll the search for new fossil fuel sources, some
major names in insurance are still helping to prop up one of greatest out-of-touch
cronies of the oil industry - the US Republican Party. Zurich and AIG have both
been major Republican donors in recent years, at a time when the party and the
Bush administration have been one of the greatest obstacles to serious global
action on climate change.(2)
While membership of industry organisations is not always an indication of genuine
action, some groups are doing significant work on climate change. These include
the Institutional Investors Group on Climate Change (IIGCC) and the Carbon Disclosure
Project (CDP), which encourages companies from all sectors to calculate and
make public their carbon footprints. The list below shows which companies from
this report are engaging with these processes:
* IIGCC : BNP Paribas (Pinnacle), HBOS (esure), Co-operative Insurance
(CIS)
* CDP members (who commit to supporting the process over and above reporting
their carbon footprint): Aviva (Norwich Union), Axa, Royal Bank of Scotland
(Direct Line, Churchill, Privilege), BNP Paribas (Pinnacle), American International
Group (AIG)
* CDP signatories (who commit to reporting their carbon footprints):
Allianz (Cornhill), Aviva, Axa, Fortis, BNP Paribas, AIG, HBOS, Legal & General,
NFU Mutual, Prudential, CIS
Eco-insurance?
A growing number of 'green insurance' products are appearing on the market,
mainly offering car insurance. The main 'environmental' feature of most of these
is that the climate change emissions caused by driving are offset by payments
to companies specialising in this.
The Green Insurance Company, ibuyeco and
climatesure are three such providers. Ethical Consumer remains sceptical about
the benefits of carbon offsetting, and therefore does not recommend these products,
especially where the insurance itself comes from companies not on the Best Buys
list. For more information on why Ethical Consumer does not support offsetting,
see the Carbon Offsets buyers' guide on this site.
Green Guide
Going green at home or driving a lower-impact car may not only be good for
the environment, but save you money. ‘Eco’ insurance schemes which
offer lower premiums to consumers making environmental changes include CIS’
car ‘ecoinsurance’ (www.ecoinsurance.co.uk)
with discounts for more fuel-efficient cars, MORE TH>N’s rate cut for
hybrid and electric cars, and Naturesave’s discounts on home insurance
for houses with features such as enhanced insulation, solar panels and water
butts.
Funding war
Insurance companies don't just profit from and help to fund climate change
industries. Many of the companies on the table have also attracted criticism
for being entangled in the arms industry, deriving income from the growth of
companies which profit from conflict.
Particularly controversial amongst the investments of the companies in this
report are, for example, Axa's holdings in companies which have been accused
of manufacturing phosphorus weapons used by the US army in Fallujah. Phosphorus
weapons are said to be designed to cause deep flesh burns.(5) Fortis has also
been accused of having holdings in companies which make cluster bombs and depleted
uranium weapons.(6) And AIG has holdings in some of the world's biggest arms manufacturers,
like Lockheed Martin and General Electric.
Arms investments, however, are also in a small way an illustration of the power
that public pressure can have on companies. French insurance giant Axa was attacked
by Amnesty International in 2006 for continuing to hold shares in companies
which produce cluster munitions, a type of bomb which spreads dozens or hundreds
of smaller 'bomblets' over an area as large as two or three football pitches.
According to NGO Handicap International, 98% of those injured by cluster munitions
are civilians. In July 2007, Axa finally caved in to the damage being done to
its image, and announced that it would be working with Handicap International
and Amnesty to identify and divest itself from the estimated $5 million(5) worth
of cluster-bomb-linked investments in its portfolio.(4)
|
|
| Arms company
| What it makes
| Who invests in it or provides financial services
|
| BAe Systems
| Submarines and military ships, military
aircraft, tanks, weaponry and missiles
| Axa, CIS, Legal & General, Lloyds TSB
|
|
|
| Cobham
| Naval equipment, army vehicles and military
aircraft
| Aviva, Axa, CIS, Legal & General, Lloyds
TSB
|
|
|
| GKN
| Fighter planes and bombers
| Aviva, Axa, CIS, Legal & General
|
|
|
Transparent shareholding
For some consumers, whatever the level of engagement being practised by investors,
some shareholdings - whether in companies which test on animals, manufacture
arms or pollute the planet - are unacceptable. This means that transparency
is vital to allow people to make informed choices.
As often happens in such
cases, it also means that those companies following 'best practice' and disclosing
their information, such as CIS and HBOS' Insight Investment division, get worse
scores on the table, while companies which don't make their holdings public
- like insure.co.uk's owner Insurance Australia, have comparatively good marks
which disguise their failure to be totally transparent. This also accounts for
the disparities between the Best Buys advice and the table.
As with any Ethical Consumer product report, all the companies can pick up
marks on the table for their own direct activities, such as infringing workers'
rights or having operations in oppressive regimes or tax havens. However, many
of the companies also have criticisms derived from their investment activities,
which explains why companies concerned with finance also have marks in categories
such as nuclear power or armaments.
Many brands also pick up boycott call marks
from companies they invest in, such as Shell and Tesco. Companies in many countries
are now legally obliged to reveal this information, either through the reports
which the US Securities & Exchange Commission requires from investment managers,
or the major shareholder lists which companies traded on the London Stock Exchange
must divulge.
Lloyds of London
Best Buy companies Naturesave and ETA differ slightly from many of the other
companies on the table by being entirely underwritten by Lloyds of London. One
of the grand old men of the insurance industry, Lloyds was legendarily founded
in an eighteenth-century London coffee shop and started out insuring the colonial
trade in slaves and sugar. In 1968 a shortage of money meant that the creaking
institution finally admitted women to its select population of wealthy individuals
(the famous Lloyds ‘names’) who originally provided the finances to
pay claims.
After a series of financial crises and scandals in the 1980s and 1990s the
Lloyds system was overhauled to allow corporate groups, as well as individuals,
to play a significant role in the organisation. Matthew Criddle of Naturesave
admits that this has undermined much of the difference between Lloyds and conventional
big insurance companies.
“There’s no such thing as an ‘ethical’ insurer at the moment,”
he contends, “because every provider is dependent on unethical funds and
capital structures at some point, especially the life insurance and pensions
providers but really any company with an investment element. Until the early
1990s Lloyds could be seen as a more ethical option because it was largely made
up of private individuals using their funds to underwrite risk, and had no corporate
capital base. But now it’s no different from most big general insurers
like Royal & Sun or Zurich.”
An ethical insurance company?
According to Naturesave’s Matthew Criddle, then, an ‘ethical insurance
company’ is one which “encourages sustainable development, rather
than those that can be identified as ethical by concentrating on their corporate
structures.”
Naturesave’s approach is to offer rebates for customers who take environmental
measures like fitting renewable energy sources and to give small business clients
comprehensive support in ‘going green.’ Its relationship with its
clients also, however, gives it clout in lobbying its Lloyds partners to become
more sustainable, because the long-term customers it attracts provide good value
to underwriters.
But, says Matthew Criddle, more effort needs to come from government. “We’re
lobbying for a ring-fenced insurance premium tax for flood defences, renewable
technologies etc, a bit like that used in France, where a 9% premium tax is
applied to all insurance to cover the costs of natural disasters.”
Engaging and divesting - how can big money be ethical?
Insurance companies make their money in two main ways. Firstly, they take
a gamble that the amount that you, the policy holder, pay them in premiums will,
over the course of your contract, be greater than the amount that you claim
back for accidents, burglaries or whatever you're insuring against.
Secondly, while they actually hold the money accumulated through your premiums,
they invest it in massive funds which are amongst the largest shareholders operating
on the world's stock markets. This is where the sustainable investment issue
becomes relevant to insurance companies, because the clout they wield by virtue
of their sheer size means that they can seriously affect company behaviour,
if - and this is key - they choose to.
According to Dr Rory Sullivan, head of investor responsibility at Insight Investment,
engagement developed as a middle ground between selling all the shares in bad
companies and turning a blind eye on corporate ethics by investors. Proponents
of engagement believe that cutting off from a company entirely means that investors
lose the ability to influence it, and should therefore only be done as an absolute
last resort. Ethical Consumer has always taken the position that without a genuine
threat of divestment, engagement is likely to be of very limited use because
companies often need to be forced into making real changes for the better.
According to Rory Sullivan, fund managers are often active in engaging on subjects
where their own interests are at stake, such as company transparency, good practice
on selection of directors and the amount of money paid to board members. "If
it's a corporate governance issue investors are all over it," he says, "because
it's in the interests of shareholders to resolve it. The results haven't been
perfect but after 15-20 years of activity from investors most British businesses
are in fairly good shape on this front."
On the other hand, says Rory Sullivan, there is still "little awareness" of
issues like pollution and human rights amongst general investors or the companies
they hold shares in. "These become an issue for investors when consumer demand
or impending regulation impacts on markets and companies because the message
that this is important hasn't got through," he says. "But investors can sometimes
work as catalysts, providing a stimulus for change and getting companies to
do things like develop and implement human rights policies or environmental
reporting."
However, Sullivan still sees difficulties for investor engagement in some of
the most pressing ethical issues. "The classic case of market failure is climate
change," he says. "Until very recently, and to an extent still, the market has
made making real reductions in climate change emissions uninteresting for companies
in the absence of either market or consumer pressure. The costs of corporate
behaviour in terms of climate change emissions have just been picked up by the
state. "Or in the case of biodiversity, companies have been effectively encouraged
to squander public goods such as fish stocks and forests because there is no
cost or incentive telling them not to."
This means that investors wanting to change company behaviour have little leverage
with boards intent on increasing profit, because they cannot point out probable
business costs of inaction, such as increased government regulation or loss
of profits.
However, Sullivan is also critical of the way in which some campaign groups
have tried to use shareholder action to force companies to change. "It's unusual
to see environmental or social shareholder resolutions in the UK," he says.
"This is often because those that have been put forward have been poorly thought
through by unsophisticated campaigners.
For instance, the Shell resolution in
2006 basically asked the company to do things it was already doing and did not
focus on the very real problems in Sakhalin and the West of Ireland. If campaigner
resolutions were better designed there might be more scope for them to be supported
by institutional investors and for the groups to work together, as happens more
in the USA."
In terms of the companies in this report, Rory Sullivan singles out CIS and
his own organisation, Insight, which handles investment for HBOS, as publishing
wide-ranging information not only on how they vote, but on how they engage directly
with companies and the results of this activity. But, he notes "most fund managers
are not that transparent."
According to Alex Van Der Velden, Executive Director of Fairpensions, a group
campaigning on ethics in the pensions and insurance industries, "if the fund
managers aren't telling you what kind of action they're taking in terms of ethical
engagement, it's probably because they're not doing any. The ones that are active
tend to make it public because it's a selling point."
Comparing the ethical engagement records of different companies is not always
easy; Fairpensions (www.fairpensions.org.uk)
and CRG Advisory (www.crgadvisory.com)
are both in the process of benchmarking UK fund managers, but no information
was available as we went to press. The voting and engagement records of the
companies covered in this report are given in this
pdf which you can download.
References
1 www.hemscott.com, August 2007
2 www.opensecrets.org, June 2007
3 email from Fortis Group, 22/08/2007
4 http://en.handicapinternational.be/index.php?action=article&numero=483,
4/9/2007
5 Banktrack, “preparations for a new Fallujah?”, March
2006
6 International Alert, “Conflict and Project Finance: exploring
options for better management of conflict risk,” January 2006
7
Friends of the Earth International, Link magazine, January 2006
9 email
from Allianz Communications Department, 31/8/2007
10 email from Ecclesiastical
PR department, 23/8/2007
11 email from Royal & Sun Alliance Corporate
Responsibility department, 8/8/2007
12 Guardian newspaper, 31/10/2006
13 email from Zurich media relations department, 29/8/2007
14
email from AIG media relations department, 27/8/2007