By Helen Wiggs, Head of Climate Change, Maria Van Der Heide, Head of EU Policy and Sonia Hierzig, Head of Financial Sector Research
Human induced climate change is “unequivocal” and its impact is being felt across the world.
That is the stark warning of the latest report from the world’s leading authority on climate science – the Intergovernmental Panel on Climate Change (IPCC).
If you turned on the news in the last few weeks, you’d have seen these warnings playing out already. From the blistering temperatures from Northwest America’s “heat dome” to the fires sweeping Turkey, Spain and Greece, from flooding in Belgium and Germany to record-breaking rainstorms in China’s Henan province.
Such events are only the latest in a long series of climate disasters bringing untold suffering, leading to mass evacuations and unexpected deaths. They are also bringing huge financial costs, as homes and communities are destroyed and lives turned upside down.
We can no longer deny that climate breakdown is in the here and now.
We urgently need to address our resilience to these risks – with the insurance sector in the spotlight
The IPCC’s warning was clear. Carbon-intensive human activity has changed the Earth’s climate in unprecedented ways, and these changes are not only inevitable, but in some cases irreversible. Only rapid and drastic cuts in emission this decade will prevent further climate destruction.
We talk often about the subject of climate risk – mitigating it, avoiding it and adapting to it.
No industry is more focused on risk than the insurance sector.
For each extreme weather event that hits, the insurance industry faces paying out. According to London based insurer Aon, the events witnessed in the first six months of 2021 could cost the industry £31 billion in compensation – the highest level of payouts in some 10 years.
Insurers assess the likelihood of different risks. They take a premium from those who want to be protected in order to pay out money if they are affected.
But these premiums don’t sit in a vault. They are invested back into the economy. Insurers do not just enable businesses to take risks. They directly invest in them so they can carry out their activities.
As enablers, insurers have a responsibility to ensure that their decisions do not contribute to the very risks they are insuring against. They have a responsibility to protect people and planet – and this means ensuring they are not fuelling future climate changes.
The insurance sector is neglecting its responsibility towards the transition to a safe, low-carbon future
But our recent report - ranking the world’s 70 largest insurers - found them neglecting this responsibility.
Few of the world’s largest insurers consider climate change in their investment and underwriting decisions. Almost half (46%) of the insurers surveyed received the lowest rating – an E.
In fact, few insurers have policies to restrict even the dirtiest of fossil fuels. Just 43 per cent of those assessed have policies restricting investment in coal power, 34 per cent in thermal coal mining and just 14 per cent for tar sands, shale oil and Arctic oil.
A similar trend is seen when it comes to underwriting. This is where an insurer takes on the financial risk of a project. Our survey showed less than half (48 per cent) of insurers offering such services refuse to underwrite coal power, 42 per cent coal mining and just 19 per cent unconventional oil and gas.
This is of particular importance. The huge scale of new fossil fuel projects means that they are unlikely to go ahead without underwriting support.
Refusing to participate could send shockwaves.
For example, in April this year, Lloyd’s of London syndicate Tokio Marine Kiln committed to no longer participating in “any future underwriting” of the Adani Carmichael mine. This is the biggest coal mine in Australia’s history; it will produce 4.6 billion tonnes of carbon pollution.
Now a total of 34 major insurers have refused to back the project, demonstrating the power that collective decision-making can have in stemming support for this dirty industry.
Insurers round the world should take note.
But if the disasters of just the last month are anything to go by, insurers must urgently continue to step up their game.
Eight of the world’s leading insurers and reinsurers committed to play their part in accelerating the economic transition through the establishment of the Net-Zero Insurance Alliance (NZIA).
While it’s great to see such initiatives emerging, progress has been too slow and top policy bodies have pressed the sector to show more ambition.
We’ve made a whole host of recommendations for next steps they could take in our Insuring Disaster report, as well as in the one-to-one engagements we’ve had with insurers since it was published.
However, the sector cannot do it on its own. A supportive regulatory landscape will also be vital.
Policymakers must regulate in support of the insurance sector’s transition
In our report, we found that larger European insurers perform better than their Asian and US counterparts on responsible investment and underwriting.
This is likely down to the strong regulatory signals on sustainable finance within Europe.
All the same, no European insurance company that was evaluated received an AAA or AA rating. There’s clearly still a lot of work to be done to raise standards.
And there’s no time like the present, as the UK and the EU are reviewing the rules for the insurance industry. The current ESG (Environmental, Social and Governance) provisions leave much to be desired, falling far short of aligning the sector with EU sustainability commitments.
Based on this, we recommend that regulators:
- Incentivise long-term investments aligned with a low-carbon transition, by increasing capital requirements for insurers with portfolios with higher climate transition risks.
- Require stewardship policies, practices and reporting, for investments and underwriting. As our research shows, only a small minority have robust stewardship strategies to ensure engagement with clients and investee companies.
- Include a “double materiality” approach in legislation for the insurance industry. While it is increasingly being regarded as good practice for insurers to consider how environmental factors constitute financial risks, holding global warming to well under 1.5 degrees will require insurers to also consider how their own business operations and investments are impacting climate change.
- Mandate the insurance industry to report on financial disclosure obligations of the Taskforce on Climate-related Financial Disclosures (TCFD) to allow for a better assessment of sustainability risks.