July 2021

Greenerindustry
Visit www.Lloyds.com/jointhereset

Introduction

01. Introduction
Climate change is the largest, most challenging
crisis the world has faced, bringing increasing risk
and uncertainty for society, and for the future of ourplanet. As a systemic risk like no other, there is anincreasing urgency for governments, industries
and communities to respond to the challenge,
as well as the scale of opportunity it presents.
Governments and industries across nations arecoming together to take action through a numberof significant commitments and initiatives toaccelerate the transition to net zero. In 2015, theParis Agreement was signed by 197 countries in abid to limit the rise in global mean temperature to
1.5C relative to pre-industrial levels. However, even
if this ambitious goal is achieved, 1.5C of global
mean temperature rise will result in significant
risk implications across society.
The construction and finance sectors haveundoubtedly contributed towards the increasein global carbon emissions. But they also bothpossess powerful tools to limit the impacts ofclimate change – and the global insurance industry
is uniquely placed to help accelerate this transition.
There is no doubting the scale of the challenge.
The construction industry contributes 39%
of global carbon emissions, so the scaleof opportunity to drive positive action anddecarbonise is significant.
In construction, we are already seeing increasing
integration of sustainable materials, buildings
re-engineered to reduce energy consumption,and efforts to reduce reliance on fossil fuels.
More broadly, the rapid decarbonisation acrosseconomies and industries; the expansion ofgreener energies; and transitioning businessmodels worldwide will require significant
capital investments.

Introduction

As innovation drives new technologies, materials
and approaches, so too the insurance sector
must innovate in its approach towards risk
transfer products and services, helping carbonintensive sectors make the transition towards
climate-positive activities.
This is an urgent and once-in-a-generation
opportunity for the global insurance industry
to support and accelerate the transition
towards a more sustainable, greener future.
Importantly, the insurance industry has asignificant opportunity to direct an increasing
share of its more than $30 trillion in assets undermanagement towards climate-positive solutions
and products.

Greener industry focuses on the construction
and finance sectors, outlining the global pathway
towards a lower carbon footprint and thechallenges on that journey that require solutions
and support. To address those challenges anddrive forward supportive risk solutions, we havealso set out a roadmap for insurance industry
action which will be critical in fast-tracking global
decarbonisation efforts and the transition to a
low carbon economy.

Greener construction

02. Greener construction
The current landscapeThe construction industry
accounts for 39% of
the world’s greenhousegas (GHG) emissions.
The World Green
Building Council has
called upon businesses,organisations, cities,
states and regions to take
immediate climate action
towards decarbonising
the built environment,with the ambition of allbuildings being net zeroby 2050, including both
new constructions andexisting building stock .
1

The Nordic region is a global leader in thedevelopment of green buildings; the region uses
30% more energy in buildings compared to therest of Europe due to its long winters and larger
living areas per person, yet the corresponding
CO2 emissions are 50% lower than the
EU average.
This is due in large part to a larger shareof renewable energy use, especially frombiomass, together with stringent requirements
for developers, contractors and suppliers
to put green credentials at the heart of any
construction activity 2.

World Green Building Council - The Net Zero Carbon Buildings Commitment| World Green Building Council (worldgbc.org)

1

2

The Explorer - Norway is greening the construction industry - The Explorer

Global greenhousegas emissions in theconstruction industry

61%
39%

Other greenhousegassesGlobal greenhousegas emissions
accounted for by theconstruction industry

28%
Operational carbon
emissions (from heating,cooling and lighting)11%
Embodied carbon
emissions (from theconstruction process
throughout the wholebuilding lifecycle)

Greener construction

Decarbonisationof construction
Decon
stru
cti
on

n

r t at i o
spo

is h

nt

Tr
an

me

• Reductions in embodied carbon, including
energy used to extract and processbuilding materials; assemble and transportcomponents; and construct, maintain,
deconstruct and dispose of buildings,
as well as the lifetime carbon footprintof the materials used.

The carbon
lifecycle ofa building

R ef u r b• Reductions in operational carbon,
such as improving the energy efficiencyof heating and cooling.

Extra
ctio
n
ssing
oce
Pr

Efforts to decarbonise the construction
sector are generally focused on two
main avenues:

ling
cyc
Re

M

ain

te n

ance

ruc
C o n stti o

nKey obstacles and role of the insurance industry
Evolving construction and property
risk landscapeThe shift towards using more sustainable materials,
new construction methods and energy sources
has significant implications for the risk profile
of a building, which need to be understood andpriced appropriately by insurers.
Building standards are continuing to evolve, withconstruction firms increasingly seeking to utilise
more sustainable materials and manufacturing
techniques, in some cases with the ultimate
ambition of achieving net zero carbon-building
accreditation. Use of such sustainable materials

is likely to introduce additional risk factors; forexample, concerns that some sustainable materials,
including insulation materials, timber-based
cladding, laminate timber and green roofing,
may be more flammable than traditional materials.
The repair risks associated with green buildings
and/or sustainable materials can also be very
specific and costly to resolve, particularly where
sustainable materials may be less durable than
traditional alternatives.

Greener construction

The UK Climate
Change Committee hasrecommended the phaseout of high-carbon
fossil-fuel and gaspowered boilers in newhomes, commercial andpublic buildings from 2025 .

Increased awareness of the risks associated withthese building methods will be crucial to ensure
challenges are properly managed and to improve
the resilience of the built environment to theserisks. Many property developers are exploring
new technologies such as ‘Internet of Things’(IoT) devices to help understand their buildings’
risk profiles and drive energy efficiency
savings through improved consumer habits.
Through working with customers, insurers can also
help customers to understand the mutual benefitsof such devices, such as through supporting early
detection of issues which may lead to insurance
claims, and help to accelerate their expansion.
Alternative construction methods such as offsite
modular construction are growing rapidly.
Such construction typically results in increased
emphasis on the need for quality control at an
early stage of the design process, and increased
scrutiny on the interoperability of modular building
materials with other construction materials,
often resulting in a positive impact from a risk
perspective on the safety of construction sites.

5

If these changes to property and construction
risks are not understood and managed properly,
this can create significant challenges and costs
for both insurers and customers. For example,
following the Grenfell fire in the UK, the UK
building sector experienced a surge in insurance
costs, with insurers also increasingly excluding
materials such as cladding from professional
indemnity policies6.
This creates a potential protection gap, acting
as a significant deterrent to investment ininnovation around greener building materials.
Insurers will need to find the balance between
providing insurance products that are reflectiveof the changing risk profile, at a premium which
is not prohibitively expensive for new building
owners and the construction industry.

A key barrier to construction method innovationis the low profit margins typically achieved byconstruction companies, which tend to range
between 2% and 8%, making it difficult forcompanies to invest in the critical technology
required to innovate3.
Changing the energy source of a building alsochanges its risk profile. The UK Climate Change
Committee estimates that around 34% of
reductions in carbon emissions within theproperty sector come from energy efficiency
measures, with a growing share attributed
to low-carbon heating4.

The global insurance industry should leverage
its data and claims experience to identify crucial
gaps in property resilience and ensure these
are addressed appropriately, and work withmaterial scientists to properly understand therisk implications. Some insurers are taking steps
to get closer to the design phase of buildings
to support these challenges. However, given
the lack of historic data for new materials andresulting reluctance from the market to provide
coverage for certain materials (e.g. timber-based
cladding), there could be a role for public-private
partnerships to obtain the level of coverage
required to facilitate growth of these materials
on a meaningful scale.

Designing Buildings - Top 4 challenges facing the constructionindustry - Designing Buildings Wiki

3The CCC - Sixth Carbon Budget - Climate Change Committee(theccc.org.uk)

4

HM Government - The Ten Point Plan for a Green Industrial Revolution(publishing.service.gov.uk)

5

Reuters - UK building sector hit by surge in insurance costs
after Grenfell fire | Reuters6Greener construction

Decarbonisation of the existing property stock
A key challenge for the sector is the decarbonisation ofexisting property stock; around 80% of current UK homes
for example will still exist in 2050, therefore there is asignificant emphasis not just on new construction
but also on retrofitting to improve energy efficiency .
7

Costs and supply chain capacity are key
challenges to retrofitting, for example to provide
low-carbon heat pumps to existing homes.
This challenge is compounded by the balance ofpolicy costs between electricity and gas, which
could make low-carbon options less competitive,
as well as a potential lack of clarity as to who willbear the cost of retrofitting existing building stock.
As a result, incentives to innovate and reducethe carbon footprint of a building beyond what isrequired by legislation are limited, with retrofitting
activities most likely to occur only during majorbuilding alterations.

Common retrofitting activities for existing building stock

Upgrade energy
and water
systems to reduce
consumption

Optimize recyclingof demolition debris
and construction
waste

Replace existing
windows withhigh-performancewindows

Consider energy
efficient lighting
using daylightand light sensors

Considerusing a cool roof
or green roof

The insurance industry can
support with encouraging
greater investment indecarbonisation initiatives
through adapting insurance
products.

Consider naturalventilation to reduceheating/coolingloads

Use a rating system(e.g. LEED) togauge the building’s
performance

Investigate
renewableenergy options

Install meters forutilities to monitor
real-time
consumption

For example, more readily including green
and/or ‘Build Back Better’ clauses withinproperty wordings can help to ensure thatdamaged properties can be rebuilt to standardsaligned to a net-zero transition. This is similar inconcept to ‘building ordinance and law coverage’
present in many property insurance policies,
which pays for the additional cost of upgrading
property to meet current building regulations.

Wired - The climate crisis issue that no one is talking about?

7

Your gas boiler | WIRED UK

Greener construction

The industry also has an opportunity to proactively
lead the transition, for example by offering policy
incentives for clients who decrease the carbon
footprint of their home. There is precedent on
which insurers can build – for example, many
insurers have experience of providing credits
to customers who have fitted freeze detection

devices and water flow sensors on their pipes.
However, it is important that such solutions arebalanced with an assessment of risk to ensure
they do not lead to increased claims exposure
if they are not reflective of the new risk profile.

Roadmap for action

The shift towards using more sustainable
materials, new construction methods andalternative energy sources has significant
implications for the risk profile of a building, which
insurers will need to understand. Insurers should
explore how to incentivise customers to lower
the carbon footprint of their building(s), and/or more readily introduce ‘Build Back Better’
wordings in policies.

Through its role as chair of the Sustainable
Markets Initiative (SMI) Insurance Task
Force, Lloyd’s has:This should be balanced with understanding
the risk profile of sustainable materials andnew construction techniques, to ensure thatthe application of these does not ultimately
result in increased claims exposure.

In addition, Lloyd’s will:• Convened a workstream dedicated todeveloping and launching an industry-wide
framework for greener insurance supply
chains to drive sustainable outcomesfor customers, including through claims
processes.

•C onduct targeted research to understandthe risk profile of new construction materials
and techniques, exploring the insurance
implications and opportunities for new
or evolved risk solutions.

Lloyd’s and Marsh’s commitment to addressing the protection
gap for new construction materials and technologies
Lloyd’s and Marsh are collaborating ona solution to managing innovation risks inconstruction through a test and learn strategy.

for the material will be offered by the market
for a limited time, with pricing agreed onrisk-based rates.

Lloyd’s and Marsh will work closely with aninsured party (a large construction company)
and its broker to scientifically assess the risk
characteristics of a new material or technology.
Following an initial research period, coverage

This experimental approach will provide
the required data and knowledge to address
the coverage gap in the longer term, forming
the basis for new products which can beoffered by the market.

Green finance

03. Green financeIntroduction
Unlocking capital to support the developmentof new industries and technologies is vital to enable
the transition towards a low-carbon economy.
Green finance initiatives aim to support the flowof capital into assets which support positive
outcomes for the environment and society.
These initiatives are not necessarily restricted
to climate-related areas but can be much broader
in scope to generate material societal benefits.
A number of industry bodies in this space arehelping to drive change including the Green
Finance Initiative and the UN Principles for
Sustainable Insurance, whilst several insurers
are making impact and long-term value
investing central to their purpose.

What is the role of the global
insurance industry?
The investments which insurers make are criticalto supporting sectors with their decarbonisation
objectives, and there is a need to accelerate efforts
to direct capital towards climate-positive solutions
and products. With more than $30 trillion in assets
under management, the global insurance industry
has deep pools of capital that if unlocked could
be increasingly directed toward investments thatdrive climate-positive outcomes in both developed
and developing nations.
There is clear demand from the global insurance
market to deploy this significant pool of capital
into green investments, with in-flows to such investments increasing significantly in recent months.

Morningstar recently
reported that global
in-flows into sustainable
funds reached $80.5bn
in the third quarterof 2020, with sustainable fund assets reaching$1.2tn globally .
8

The Lloyd’s market has substantial capital at its
disposal (c.£85 billion9), demonstrating there isa significant opportunity for the Lloyd’s market
to make a positive impact through directing
capital towards green investments.
8

Sustainable assets reach $1.2 trillion in Q3 | ESG Investing9

Lloyd’s of London proprietary market data (accessed 30 March 2021)

Green finance

What actions can be taken to accelerate the flow of capital
into green investments?
The insurance industry is taking steps to support the flow of capital
into green investments through the use of different levers:

01

02

In the first instance, applying
exclusions is seen as aneffective approach to shifting
investments away fromparticularly carbon-intensive
sectors, however it does forego
the opportunity to engage withcorporates involved in suchsectors on their respective
transition pathways.

We are starting to see investors
complement exclusion
policies with structured voting
and engagement activities,
particularly in the equities
market. Insurers have a roleto play in helping industries with
their transition and leveraging
their influence as a capitalprovider to put pressure oncompanies around the actions
they are taking to support
decarbonisation.

03

04

The integration of ESG(environmental,social and governance)
factors can help to embed
non-quantifiable risks into
the investment decision
making process and support
identification of opportunities
to actively invest in corporates
and sectors critical to thetransition.

Some insurers are actively
making ‘impact’ investments,
which are investments madewith the intention to generate
positive, measurable social andenvironmental impact alongside
a financial return. This is away in which the industry cantherefore take affirmative action
to proactively invest in parts ofthe economy that are actively
decarbonising.

There are several challenges to overcome to increase insurance investors’
allocation to green assets. This includes the availability of such assets to achieve
the necessary scale to drive the low carbon transition, a consistent taxonomy
to define ‘green’, and data availability to test the green credentials of assets.
A strong understanding of the contribution of different sectors towards
decarbonisation pathways will be crucial, in order to ensure investments
are directed towards the parts of the economy where they will havethe greatest positive impact.

Green financeGreen finance initiatives within
the Lloyd’s market
Recognising the acceleration of activities acrossthe global insurance industry in this space, theLloyd’s market has taken positive steps through its
recent commitments. This includes the allocationof 5% of the Corporation of Lloyd’s Central Fundto impact investments by 2022; the phase outof new investments in thermal coal-fired power
plants, thermal coal mines, oil sands and new Arctic
energy exploration activities; and the commitment
to develop guidance on impact investing to support
participants in the Lloyd’s market to create their
responsible investment strategies.

It is therefore unrealistic to expect the Lloyd’s
market to invest substantially in long-dated
assets, such as infrastructure loans for example,
however there is still a considerable universeof shorter-dated green investments which alsosatisfy the market’s broader liquidity and solvency
requirements.
These activities are, in part, driven by a numberof broader initiatives seeking to accelerate
the drive towards greener finance.

For example, as partof the United Nationsconvened Net Zero
Asset Owner Alliance,
35 institutional investors
including insurers,
representing $5.5
trillion assets undermanagement , havepledged commitment
to transitioning theirinvestment portfolios
to net-zero GHG
emissions by 2050.
1010UN-convened Net Zero Asset Owner Alliance – Introduction to the AllianceGreen financeIn addition, signatories to the UN’s Principles for Responsible Investment
have committed to a set of investment principles and associated actions
for incorporating ESG issues into investment practice.
Lloyd’s case study
The insurance industry is taking steps to support
the flow of capital into green investments throughthe use of different levers:

Green:The Corporation invested in an International Development
Association (IDA) bond, the proceeds of which will support
the financing of green projects and programs in eligible IDA
countries to advance Sustainable Development Goals.
This offers investors an efficient way to contribute todevelopment in the world’s poorest countries.

Social:The Corporation invested in a social bond issued by the
National Australia Bank, which is aligned to the International
Capital Market Association’s Social Bond Guidance. Proceeds
are earmarked for (re)financing a portfolio of organisations acrossAustralia that hold the Employer of Choice for Gender Equality
citations from the Workplace Gender Equality Agency.

Sustainable:
The Corporation invested in a sustainable bond whose proceeds areallocated to (re)finance existing and/or future projects or businesses
which meet eligibility criteria as defined in the issuer’s sustainability
bond framework. This framework, developed post the outbreakof COVID-19, has been expanded to focus on climate change
mitigation, disaster resiliency, healthcare and social well-being.

There are several challenges to overcome to increase insurance investors’ allocation
to green assets. This includes the availability of such assets to achieve the necessary
scale to drive the low carbon transition, a consistent taxonomy to define ‘green’,and data availability to test the green credentials of assets.
A strong understanding of the contribution of different sectors towards decarbonisation
pathways will be crucial, in order to ensure investments are directed towards the partsof the economy where they will have the greatest positive impact.

Green financeRoadmap for action

The insurance industry has a significant
opportunity to direct an increasing share of its
more than $30 trillion in assets under management
towards climate-positive solutions and products.
It can achieve this through actively integrating
ESG factors into the investment decision making
process; proactively making impact investments
into areas of the economy which are actively
decarbonising; and excluding investment fromparticularly carbon-intensive sectors which are
failing to commit to the transition.
There is also a significant opportunity for the
global (re)insurance industry to collaborate withinvestors and governments to provide financing
structures to support disaster resilience,
response and recovery in developing countries.

Through its role as chair of the SMI
Insurance Task Force, Lloyd’s has:• Convened a workstream focused on supportingand encouraging more sustainable investment;
in 2021, the workstream will develop aframework for accelerating and scalingsustainable investment, to help unlock the
global insurance industry’s more than $30tn
in assets under management, increasingly
directing capital towards investments thatdrive climate-positive outcomes in bothdeveloped and developing nations.
In addition, Lloyd’s will:• Convene a workstream dedicated toestablishing a public-private disaster
resilience, response, and recovery framework
to help protect developing nations from theevolving economic and societal impactsof climate change, including the effects ofincreasingly frequent and severe weather
events. The framework will combine an
insurance product with risk management
and loss recovery services. Lloyd’s, aspart of the SMI, will work closely withkey stakeholders including (re)insurers,
governments, aid agencies and data
providers to deliver a pilot scheme in 2021.

04. Committing to action
Lloyd’s and the global insurance industry are uniquely
positioned to facilitate efforts across communities,businesses and governments around the world todrive a transition to a lower carbon economy.
We have engaged with a range of insurers, Lloyd’s
market participants and corporates to assess thescale and complexity of decarbonisation ambitions
across both the construction and finance sectors.

Action the
global insurance
industry shouldtake

The actions taken by the insurance industry today
to support the scale and pace of ambition fromboth governments and businesses will be criticalin driving positive, long-term change.

Greener construction

Greener finance

Incentivise customers to lower their buildings’
carbon footprint; introduce ‘Build Back Better’
wordings in policies.

Direct capital towards climate-positive solutions
through integrating ESG factors into investment
decisions and identifying impact investment
opportunities.
Work with investors and governments to provide
financing structures to support disaster response
and recovery in developing countries.

Actions that will
be delivered
through the
Sustainable
Markets Initiative
Insurance
Taskforce

Develop standards to encourage innovation acrossthe insurance supply chain with a potential
focus on ‘Build Back Better’ clauses within homeinsurance products.

Develop a consolidated framework to accelerateinstitutional investment in long-dated green assets.

Actions that
Lloyd’s will take

Convene construction companies, insurers
and brokers to understand the risk profile of
new materials and construction techniques.

N/A

Develop a framework and pilot to support disaster
response and recovery in developing countries.

Conduct targeted research to explore theinsurance implications of new construction
materials and techniques.
Together, by taking immediate action on climatechange, Lloyd’s and the insurance community
can make a positive contribution. Actions suchas adapting insurance products to encourage
clients to ‘Build Back Better’ and lower the carbon
footprint of the built environment are supported bycommitments to deepen the insurance industry’s
understanding of the risk implications of newbuilding materials.
Lloyd’s own commitments are wide-ranging, fromconvening a workstream dedicated to sustainable
innovation as Chair of the Sustainable Markets
Initiative (SMI) Insurance Taskforce, to leading
research into new construction materials andtechnologies.

From a finance perspective, Lloyd’s and the global
insurance industry have the power to actively
accelerate the pace of growth of climate-positive
solutions through their investment strategies.
The global insurance industry must alsocollaborate to support disaster resilience andrecovery efforts as climate change continues
to adversely impact developing nations inparticular. Through its role on the SMI Insurance
Taskforce, Lloyd’s will take a proactive approachto addressing both of these issues.

Discover how we are guiding ourcustomers towards a greener future.
Visit www.Lloyds.com/jointhereset