Changing the way we do business
Companies are increasingly recognizing the adverse impacts resulting from biodiversity decline, such as risks to their operations and supply chains, as well as liability, regulatory, reputational and financial risks. Biodiversity conservation and restoration can provide opportunities for companies in terms of sustainable business models, cost savings and improved relations with stakeholders.
Private sector involvement is key in the efforts to mitigate biodiversity loss considering the gap in required funds; currently, about $39 billion per year is allocated to conservation while an estimated $300 to $400 billion per year is needed to preserve healthy ecosystems²⁹. Conversely, approximately $500 billion per year flow to fossil-fuel and agriculture subsidies³⁰. To channel private funds towards biodiversity, different mechanisms exist, such as investments in natural infrastructure and sustainable supply chains, biodiversity offsets, carbon offsets, impact investing or establishing natural capital as an asset class. However, one of the main barriers to scaling up investment for conservation is the present lack of commonly accepted metrics such as those developed for climate change, inconsistent data and tools to measure biodiversity impacts.
In spite of these challenges, AXA has started to build biodiversity into its corporate responsibility strategy as an extension of its climate change pledges. AXA has been a leader on climate change within the financial industry and was the first major insurer to divest from coal in 2015. It has also committed €12 billion to new, green investments by 2020. This has included investments in real assets, private equity and green bonds. On green bonds in particular, AXA has developed a detailed due diligence process and system to ensure the quality of green bond offerings, which has resulted in a line by line assessment of over 400 green bonds.
Our conversation with Céline Soubranne, AXA Group, Suzanne Scatliffe, AXA XL – the Group’s Property & Casualty and Speciality Risk division – and Emily Landis, from The Nature Conservancy, outlined the relevance of biodiversity for AXA as a responsible company and its main commitments in this area.
Corporate Social Responsibility Director, AXA XL
“For a long time, the role of nature in combating climate change has been underestimated by society. That is now starting to shift. It is impossible to adequately tackle climate change without addressing biodiversity and ecosystem loss. Ultimately by conserving nature and restoring ecosystems we reduce vulnerability and increase resilience – the essence of our purpose as an insurer.”
“With biodiversity loss, there are true societal concerns. There are also clear connections with AXA’s business. What is happening is a wake-up call. Everyone knows the situation is serious and it is now time to come up with solutions. We need more research and we have to work through both our insurance products and our investments to help companies adapt and make the to a more environmentally sustainable future.”
Chief Sustainability Officer
Why is biodiversity important to AXA?
Beyond the moral argument of preserving biodiversity, its decline has several implications for AXA’s business.
In recent years, the stronger intensity of storms, hurricanes, flooding and forest fires, coupled to urbanization, has resulted in more damage and an increase in claims, impacting the Property & Casualty business line of the insurance sector. In 2017 and 2018, the insurance industry paid out nearly $230 billion31 on natural disasters. We know that ecosystems, such as wetlands and coral reefs, help protect coastal areas against storm damage and flooding. Nature also helps in the fight against climate change itself – by storing carbon, for example, in the case of peatlands. By protecting natural capital, insurers can also protect local communities and businesses and, over time, reduce the impact of natural disaster-related claims. Worldwide, more than half of the current losses from natural disasters are not covered by insurance. This is true of developing countries, where there is no tradition of insurance, but it also often applies to developed countries. In Houston, Texas, 80% of homes were not insured for flood damage in 2017 when parts of the city were devastated by Hurricane Harvey32 with only 28% of the homes in ‘high-risk’ areas for flooding.
The decline in the ‘natural world’ also has implications for our health: the poorer quality and variety of our diets due to the reduction of existing crops and a weaker capacity of natural ecosystems to provide us with fresh air and clean water and the reduced availability of natural resources for our medicine – all have the potential to negatively affect our health with higher ensuing costs for the insurance business.
Furthermore, biodiversity loss is a material issue for the complex supply chains of companies operating in different sectors, such as food, agriculture, retail, luxury or pharmaceuticals.
Turning carbon blue
Carbon credits – tradable permits to emit carbon dioxide – have existed since the 1990s. AXA XL and The Nature Conservancy (TNC) are working on extending the concept to blue carbon and resilience, with the objective of creating a market value for the resilience services provided by coastal wetlands such as salt marshes and mangroves, and driving investment in these ecosystems. These areas help protect local communities from erosion, flooding and storm surges, and they are also important in the fight against climate change and biodiversity loss.
For this initiative, two blue carbon sites have been identified in the United States, the Virginia Coast Reserve in Virginia and Rookery Bay in Florida, as well as a third site in Belize – the atolls off the coast of Belize City.
Additionally, talks are underway on a possible fourth site in the Caribbean. While blue carbon sites are chosen on the basis of their environmental importance, government and local community buy-in is also vital.
These ‘blue resilience carbon credits’ should appeal to investors with a direct interest – hotel groups that want to preserve local areas of natural beauty, or insurance companies that recognize the importance of building resilience. Ideally, with more investment in ‘green infrastructure’, we can reduce reliance on traditional ‘grey infrastructure’ such as concrete sea walls. The credits are also tied to the Sustainable Development Goals (SDGs) – specifically, to goal 13 – Climate Action – which calls for greater resilience and adaptive capacity to climate-related hazards and natural disasters.
The rarefaction or destruction of natural ecosystems they depend on for their products can result in significant business and financial impact for them. Through insuring and investing in these companies, the insurance industry is also indirectly exposed to the decline of biodiversity. Hence the importance of integrating biodiversity considerations into investment decisions and engaging with companies to create value for both investors and companies.
What is AXA doing about biodiversity loss?
AXA’s strategy focuses on two main areas: oceans and forests. Both are key to combating biodiversity loss and climate change and have direct relevance for AXA’s business as an insurer. AXA’s strategy operates on several fronts:
Insurance: AXA works directly with customers on environmental risk. The Group provides coverage for companies’ liabilities, parametric solutions to the physical impacts of climate change, and offers advice on risk mitigation. AXA is now also looking to develop new, innovative products which include blue carbon credits and insurance for natural systems such as coral reefs and mangroves.
Investment: Biodiversity will be increasingly built into AXA’s approach to responsible investment, through engaging with the companies the Group invests in and also through the launch in 2019 of a new impact fund for climate and biodiversity. The latter provides the Group with €200 million to invest in projects that protect natural habitats, and to deliver economic and social benefits to local communities.
Research: AXA is committed to research through its scientific philanthropy initiative, the Research Fund, and supports over sixty projects related to biodiversity, for a total of €10 million. Through this commitment, research will continue to provide a scientific basis for informed decision-making in insurance, investment and corporate responsibility.
Corporate responsibility: The fight against biodiversity loss will need broad action and requires stronger collaboration between the private and public sectors, as well as NGOs, which often have the expertise and local knowledge necessary for effective policy. In May 2019, AXA issued a series of recommendations jointly with WWF France33 and urged governments to set clear priorities. Presented at the G7 meeting in Metz, the recommendations included:
- Setting up a Task Force on Nature Impact Disclosures, similar to the Task Force for Climate-Related Financial Disclosures (TCFD), established after the Paris Climate Conference in 2015. The Task Force will examine ways for companies to assess and report their biodiversity risk as well as their strategy for dealing with that risk;
- Including biodiversity criteria in models used by leading non-financial rating agencies to assess companies’ environmental, social and governance (ESG) performance34 – at the same time, tightening up accreditation for these rating agencies;
- Developing a framework for investors to make it easier to analyze biodiversity risk, especially in vulnerable sectors such as agriculture, tourism and mining. An effective framework would allow the finance industry to engage more effectively with companies it invests in or lends to;
- Labelling financial products that have a positive effect on nature – this would raise public awareness, tap into consumers’ increasing preference for ecofriendly products and help direct more investment to protecting biodiversity and natural resources.
Coastal Wetlands Strategy Lead, The Nature Conservancy
“Carbon resilience credits are a way of preserving ecosystems for their value to mitigate climate change, protect people and our coastlines. However, coastal wetlands have traditionally received less funding compared with forests for climate mitigation. There is a need to increase investments in restoration and monitoring, including to provide a refuge for the biodiversity that depends on these coastal wetlands. The appeal of blue carbon resilience for companies lies in the fact that they can have traditional carbon offsets, while also investing in natural flood barriers and other co-benefits.”
Economic losses from natural catastrophes in 2017 and 2018 together totaled more than $505 billion. Less than half of these losses were insured.
Source: Swiss Re Institute (2019)
The Living Planet Index shows a decline of 60% in the population sizes of wildlife over the past four decades; the index surveys the health of thousands of species and populations around the world.
Source: WWF /Zoological Society of London (2018)
Seventy percent of drugs used to treat cancer are natural or synthetic products inspired by nature. In addition, some 60% of the world’s population rely on traditional medicine, many of which are based on plants and herbs.
Source: IPBES (2019)
29 Crédit Suisse AG and McKinsey Center for Business and Environment, Conservation Finance – From Niche to Mainstream: The Building of an Institutional Asset Class, 2016.
30 OECD (2019), Biodiversity: Finance and the Economic and Business Case for Action, report prepared for the G7 Environment Ministers’ Meeting, 5-6 May, 2019.
31 Swiss Re Institute (Sigma estimates), 2018. 32 Munich Re: Towards a Flood Resilient Future – A US Perspective (2018). Following Hurricane Harvey in 2017, flood insurance rates in Houston have increased by an estimated 15%-20%.
33 Recommendations from Into The Wild – Integrating Nature into Investment Strategies, published by WWF France and AXA.
34 ESG performance measures the sustainability aspect of companies’ operations.