As the dust settles on COP26, Liz Booth examines the role of the insurance profession in the transition to a carbon-neutral future
Global institutional investors have significantly raised their ambitions to implement net-zero commitments across portfolios in the last 12 months, while being increasingly aware of the challenges in meeting these targets, according to Aviva.
The latest Aviva Investors Real Assets Study found that 52% of insurers and 50% of pension funds have committed to achieving net zero in their portfolios before 2050, an overall increase of
12 percentage points compared to the last 12 months.
Of those committed to achieving net zero by 2050, European insurers (53%) lead the way versus their North American and Asian counterparts (both 51%), while North American pension funds (60%) are significantly ahead of their counterparts in Europe (47%) and Asia (41%). Some 67% of all pension funds surveyed now have some form of net-zero commitments in place, compared to just 47% last year.
According to the study, reflecting the desire for greater transparency on the integration of environmental, social, and governance (ESG) factors into real assets strategies, 55% of pension funds view asset managers’ ability to integrate ESG factors into the investment process as being critical, while 50% of insurers feel that the ability of managers to quantify ESG risk and impact is most important.
The question is whether this trend is here to stay or is just the flavour of the month, as the great and the good descended on Glasgow early in November for the COP26 climate change conference.
With those very same great and good tripping over each other to say the right thing and to demand the right changes, the other question is: where was insurance in all of that?
The good news for insurers is that they did appear to have a voice. That’s not to say that change will be instant nor that some very real challenges do not remain, but there was a perception that the role of insurance as an adaptation tool is increasing.
52% of insurers and 50% of pension funds have committed to achieving net zero in their portfolios before 2050 Source: Aviva
Eric Usher, who heads the United Nations Environment Programme Finance Initiative, stresses: “The insurance industry plays a three-part role as risk managers, insurers and investors, which uniquely positions the industry to help support the building of climate-resilient economies.”
Many in the profession agree. Amy Barnes, head of sustainability and climate change strategy at Marsh, says: “The insurance industry is well positioned to be a key facilitator of the four COP26 goals. There are a number of initiatives in place and being established to support the industry’s role in supporting the COP26 targets. The key to the insurance industry’s support, however, is its ability both to be innovative and to respond to innovation.
“The insurance industry’s legacy of helping communities and sectors build resilience against disasters is well known. What is far less recognised is the amount of expertise, data and resource there is within the industry. These are key building blocks for creating innovative products and solutions that support climate action.”
She adds: “These building blocks can support the further development of risk-sharing mechanisms that underpin the climate-related efforts of developing countries. The Insurance Development Forum (IDF), launched at COP21 in Paris, highlights the critical role that risk management and resilience play in climate action.”
Her words are echoed by lawyers from McDermott Will & Emery, who say: “The insurance industry was front and centre before, during and after the first days of COP26. The UN’s special adviser to the secretary-general on climate action, Selwin Hart, called on insurers to lead the way to greater resilience by increasing solutions for the poor and expanding coverage to fill protection gaps.”
The lawyers add: “Simultaneously, there appears to be an understanding that the industry cannot address all climate-change issues – principally ‘slow onset’ conditions – but also a recognition that the industry will play a major role in handling ‘loss and damage’ from extreme events and the lengthy period of financing adaptation efforts, particularly in countries with limited resources.”
They also point to members of the Net-Zero Insurance Alliance, who spoke of the desire for the insurance profession to serve as an enabler of the great transition toward a decarbonised economy, one that will likely require a $100trn (£750trn) investment.
Mark Carney, the former governor of the Bank of England, announced that 450 firms representing $130trn (£97trn) in assets have signed the Glasgow Financial Alliance for Net Zero, which requires signatories to establish interim goals for 2030 and commit to net-zero carbon emissions by 2050.
Also at COP26, the UN-sponsored IDF unveiled the Global Risk Modelling Alliance, which is designed to enable developing countries to better understand the physical risks that climate change is posing and will continue to pose.
“Advances in modelling will benefit the entire planet as climate change contributes to more and more extreme events,” conclude the McDermott Will & Emery lawyers.
Liz Booth is contributing editor of The Journal