How does Hiscox think about the relationship between climate- related liability and asset risk? James Millard: While we carefully manage the underwriting risks associated with climate change, we also recognize new opportunities as customers’ risks evolve. One example of a clearly growing risk is flood. We’ve done a huge amount of work to understand U.S. flood risk, specifically. Our U.S. flood product, FloodPlus, provides broader, more attractive cover for homeowners and businesses than the government-backed alternative, and now serves over 75,000 customers across 49 states. We try to reduce correlations between our underwriting and investment portfolios where we have significant exposures. With respect to climate, we apply our ESG exclusions policy to sectors unlikely to be part of the transition to net zero in both our investment and our underwriting portfolios. We also think about how, for example, the unique insights we get into climate from our market-leading natural catastrophe research and modelling team can inform what we do as an investor. There is lots of collaboration on ESG and climate-related matters across the business, but how that translates into the sustainability of our asset managers and investee companies is something we’re still developing. How does Hiscox think about the net-zero transition? James Millard: As a Group, Hiscox has been operationally carbon-neutral since 2014, and we’ll continue to offset our emissions via accredited offset schemes. We’ve also recently set new greenhouse targets, including for investments, to align with a 1.5°C warming scenario, using the Science Based Targets Initiative (SBTi) methodologies. This means Hiscox could be net zero by 2050. We’ve committed to reduce our Scope 1 and 2 emissions by 50% in absolute terms and our Scope 3 emissions by 25% per employee by 2030, against a 2020 baseline adjusted to correct for the impact of COVID-19 on business travel, office use and other factors. We also aim to have more than 25% of the value of our corporate bond portfolio meet net-zero or Paris- aligned targets by 2025, and more than 50% by 2030. We prefer an SBTi-
aligned approach because, while disinvesting from companies may reduce our measured carbon footprint, engagement can help them play a role in the net- zero transition and ultimately have more of a real-world impact. Getting to net zero is a shared challenge, which is why we are also engaging with our suppliers, brokers and reinsurers on our commitments and their own plans to adopt Paris-aligned targets. Where common standards and methodologies do not yet exist—for example, in measuring and assessing supply chain impacts, and underwritten emissions—we want to foster collaboration within our industry to help shape the solution. A significant proportion of Hiscox’s assets are in bonds, of which much is short-dated. What do you say to those who argue that it’s difficult to have influence as a bondholder, and that long-term ESG risks pose little threat to short-dated investments? James Millard: The traditional view is that voting rights give shareholders the most influence on corporate behavior. In practice, however, short-term debt financing is an important part of an issuer’s capital structure, and debt issuance and refinancing typically occurs more frequently than equity issuance. That gives asset owners like us real opportunities to engage with issuers. We see the rapidly growing demand for, and issuance of, ESG-related bonds as evidence of this. We already have over $220 million in ESG-related bonds, and our short-dated portfolios enable us to quickly reinvest proceeds from distributions and maturities in issues and issuers that align with our responsible investment objectives. Some labelled bonds not only incentivize issuers to act in a more sustainable manner, they also offer lower expected volatility and better secondary market liquidity with very little detriment to returns. Our managers need strong ESG capabilities to ensure they do exactly what they say on the tin, but further development and alignment of standards, such as sustainable taxonomy regulations and non-financial disclosures, will really help us to boost exposure here.
2021 ESG ANNUAL REPORT
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