The recent departure of three of Europe’s largest insurers from the Net-Zero Insurance Alliance (NZIA), part of the wider Glasgow Financial Alliance for Net Zero (GFANZ), represents perhaps the biggest blow to the GFANZ alliance to date.
On Thursday 25th May, French insurer AXA (a former group chair); reinsurer SCOR and German insurer Allianz each announced they were quitting the group, bringing the total number of NZIA exits to seven, all within the past two months.
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Given that every fossil fuel project requires insurance in order to commence operations, insurers are a lifeline to the industry. Insurers’ policies restricting the underwriting of coal, oil and gas projects therefore fall under heightened scrutiny in a world aiming for net-zero greenhouse gas emissions, especially since just a handful of insurers control an outsized share of the property and casualty insurance market.
In recent months, insurers’ perceived ability to distort market prices by refusing to underwrite certain fossil fuel projects on climate grounds has made them vulnerable to accusations of breaching antitrust laws designed to ensure that institutions are not able to make decisions behind closed doors that could distort market competition.
In mid-May, 23 attorney-generals issued an explicit warning to NZIA members, that they could be violating antitrust laws through their membership of the group.
Net-zero policies leading to market distortion
A 2022 review of the insurance market for the power sector from global broker Willis Towers Watson found that operators of coal power plants currently face “bleak prospects” and experience “extreme challenges” in accessing insurance, considering the number of insurers that have set policies restricting their coal underwriting.
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By GlobalDataClimate campaign group Insure our Future’s report on the “insurers of last resort” still underwriting new coal projects for Korean power utility Kepco, for example, found that between 2018 and 2022, 72% of the insurance capacity that underwrote the Nghi Son 2 coal power plant in Vietnam exited the market for new coal projects due to climate-focused policies set mainly by European and (later) US-based insurers.
Reduced competition means insurers are able to increase their prices: Willis Towers Watson’s review finds that coal power operators are facing steep rate hikes – up to 20% on the previous year – in the face of some insurers exiting the coal market.
Yet crucially, insurers implementing policies that restrict underwriting services for fossil fuel majors have, to date, seemingly done so on an individual basis and not as part of coordinated action.
While members of the NZIA commit to aligning their businesses with net-zero emissions by 2050, they have not committed to any specific policies around fossil fuels, mainly due to the threat of antitrust litigation.
Last summer, the NZIA was forced to back away from a proposal that would force members to commit to exiting coal insurance, following legal advice from lawyers at global law firm Norton Rose Fulbright.
The anti-ESG agenda is spreading
In light of ongoing accusations – primarily from Republican politicians spearheading an anti-ESG campaign in the US – that financial alliances for net zero are engaging in “cartel-like” behaviour in committing to restrict investment in fossil fuel majors, a number of members have exited GFANZ in recent months, despite it only being established in November 2021 in the run-up to COP26.
In April, three of Europe’s major insurers, Munich Re, Zurich and Hannover Re, each pulled out of the NZIA, with Munich Re specifically citing antitrust risks as the reason behind its departure.
It is no coincidence that these recent departures have coincided with the “anti-woke” culture war brewing in the US, says Peter Tufano, senior advisor at the Salata Institute for Climate and Sustainability at Harvard University.
Similarly, Peter Bosshard, who coordinates the international Insure Our Future campaign, notes that each of the three insurers pulling out of the NZIA derive roughly one-third of their revenue from the US market, and are therefore “vulnerable to its political follies”.
The fact that some companies may be choosing to hold back from the alliances is likely just a counsel of prudence cautioning that they don’t want to be caught in an argument.
Alec Burnside, a lawyer practising in the field of EU and UK competition law at international law firm Dechert
While Tufano believes that the existing threat of antitrust allegations has been exaggerated by Republican politicians, he does point out that they are not without precedent. For example, in 2019, under the Trump administration, the US Department of Justice carried out an antitrust investigation into voluntary agreements among carmakers and the state of California to reduce vehicle emissions.
In a piece co-authored by Tufano in October 2022, the authors point out that given the “real uncertainty and concern around the legality of certain cooperative activities”, “fear of prosecution can have a chilling effect”. This may, the authors say, “explain why some collaborations seem relatively toothless”.
The political debate was further escalated last spring, when Arizona’s then-Attorney General Mark Brnovich wrote an op-ed in the Wall Street Journal claiming he was investigating what is potentially “the biggest antitrust violation in history”: Wall Street banks “bragging about their coordinated efforts to choke off investment in [fossil fuel] energy” via the GFANZ alliance.
Antitrust concerns are legitimate… to a point
“These are legitimate business concerns for many global players… but according to some attorneys, they are not necessarily grounded in well-formed legal arguments,” says Tufano, underscoring the importance of their emerging within “the context of the anti-ESG, anti-woke issues that are plaguing America”.
NZIA representatives declined Energy Monitor’s request for comment (sent prior to May's departures) on whether being a member of the alliance breaches competition laws. They instead shared a statement, published on 12 April, which states that “from the outset the NZIA has been clear that it and its members will comply with applicable laws, rules, and regulations, including antitrust”.
Alec Burnside, a lawyer practising in the field of EU and UK competition law at international law firm Dechert, told Energy Monitor that he has not seen “any antitrust authority, anywhere in the world, having an issue with any of these [GFANZ] alliances".
“The fact that some companies may be choosing to hold back from the alliances is likely just a counsel of prudence cautioning that they don’t want to be caught in an argument," he adds. "Even if they are not wrong, being in an argument and having to defend [themselves] is a distraction.”
Burnside notes that were antitrust laws in relation to climate change to progress to litigation, “any antitrust analysis runs in two stages”. First, lawyers would assess whether there is a “restriction of competition”, and if there was they would then explore whether or not there are “benefits arising from these arrangements that outweigh that restriction”.
Burnside says that, historically, US antitrust lawyers in particular have focused “almost entirely on pricing; in recent years, quality criteria have been given more weight including ESG considerations”. He adds: “Not least, the idea that externalities can be weighed in the balance of determinants and benefits; for example, safeguarding the environment as a benefit to society as a whole.”
Keep up with Energy Monitor: Subscribe to our weekly newsletterHe is relatively confident that as discussions progress, “it's entirely likely that the authorities [would] come out with a favourable assessment of these arrangements from the antitrust point of view”, caveating that it is not “clear if anybody has gotten around to formally asking for an assessment”.
A more pertinent question perhaps is whether financial institutions must be members of an alliance in order to take decisive climate action.
In its statement on leaving the NZIA, Munich Re noted that “opportunities to pursue decarbonization goals in a collective approach without exposing ourselves to material antitrust risks are so limited that it is more effective to pursue our climate ambitions individually”, which indicates it has no intention of dropping any of its existing policies that limit underwriting on new oil and gas projects.
Indeed, according to a 2022 assessment of insurers' fossil fuel policies published in October 2022 by the Insure Our Future campaign, Munich Re, along with “industry heavyweights” such as Allianz and Swiss Re, are among those insurers adopting “significant” exclusions around oil and gas underwriting.
The report notes that 41 insurers have withdrawn or reduced coverage for coal to date, representing 39.3% of the primary insurance market and 62.1% of the reinsurance market. In 2020, just 26.5% and 49% of these markets, respectively, had taken on such commitments.
While progress is slower for oil and gas, with just 13 insurers implementing restrictions on conventional oil and gas (rising from three in 2021), Bosshard argues that exiting these alliances is unlikely to materially impact these insurers’ commitments to net zero.
Bosshard even suggests that in departing from the NZIA, these insurers are inviting “even more scrutiny” over their net-zero plans, adding that as none of them have departed from the Net-Zero Asset Owners Alliance, too, it is likely that their decision to leave the NZIA is directly related to issues pertaining to the group’s concerns around antitrust laws, rather than the broader aim of reaching net-zero emissions by 2050.
“In spite of the US anti-ESG campaign, the shift in the insurance industry away from fossil fuels continues,” Bosshard told Energy Monitor, noting that in early May, Talanx, the parent company of Hannover Re and HDI, announced plans to expand its underwriting exclusions restricting insurance for new oil and gas projects from July.
On Thursday, Insure Our Future called on AXA, Allianz and Scor to 'confirm their 1.5°C commitments by adopting further oil & gas restrictions'.
Bosshard adds that were US policymakers to actively boycott insurers taking climate action seriously within their respective states, it would “very much be an own goal”, as there is already evidence to suggest that such boycotts incur an added cost to taxpayers due to squeezed competition. Ironically, this is exactly what Republicans claim they are seeking to prevent.
An added irony, notes Bosshard, is that states like Florida and Texas, which are “actively leading the charge against climate action”, are those that are particularly affected by climate disasters and therefore require wider insurance coverage. As such, any Republican moves to boycott specific insurers on the basis of their net-zero commitments are unlikely to be popular with the electorate.
Clearer guidance on what antitrust laws mean for climate action is crucial
“Given the scale of the climate crisis that we face, it is going to require a combination of government action, business action, and in between it is going to require collaborative action,” says Tufano, noting that “voluntary associations have no real enforcement power”.
Over the past few months, lawyers like Dechert’s Burnside have been calling on regulators to produce better guidance for how financial institutions might navigate these concerns. The UK’s Competition and Markets Authority has so far done the most in this regard. In February, it published draft guidance on its intended approach towards business collaborations that pursue environmental sustainability goals, although there are no specific notes on financial alliances.
A European Commission spokesperson told Energy Monitor it is “currently finalising its review process” of guidelines that “will contain a new chapter on sustainability agreements with guidance for companies in all sectors to assist them with the self-assessment of their cooperation agreements pursuing sustainability objectives”.
Coming into force in June 2023, this guidance will take a “balanced approach to ensure that the antitrust rules are not seen as an obstacle to genuine sustainability initiatives (which, in many cases, may not restrict competition or not appreciably), while protecting competition and consumers against greenwashing”.
Until this guidance is finalised, the fate of the NZIA could lie at the mercy of the whims of Republican politicians. Thankfully, it seems a number of insurers appear, for now, determined to carry out their climate objectives regardless of whether it is part of coordinated action.
Editors note: this post was amended on Friday 26th May to account for the departures of Allianz, AXA and Scor from the NZIA
