Three ways to make climate central to business
Climate change is one of the biggest global challenges that will shape the way we do business now and in coming decades. I was one of 79 CEOs who signed an open letter that stresses the need to actively manage climate risks and incorporate them in decision-making processes – not least to realize growth opportunities. Here is how we, an insurer and investor, will make climate part of our day-to-day operations:1. ANTICIPATE: MAKE CLIMATE CONSIDERATIONS A MAINSTREAM PART OF BUSINESS
Companies are well advised to incorporate climate change considerations into their agendas. Let’s take carbon risk as an example. The Carbon Tracker Initiative highlighted in 2011 that companies whose business models are based on exploiting proven reserves of fossil fuels would face substantial asset write-downs once climate policy becomes more stringent. If policymakers agree on serious action to limit global warming to 2°C their current business models would become unsustainable. That’s no marginal ‘green issue.’
For investors, carbon risk is as material as credit or liquidity risk and must be included in mainstream portfolio analysis. Long-term investors, such as insurance companies, play a leading role here. For example, the signatories of the Portfolio Decarbonization Coalition have already committed to measuring their carbon footprint, scaling back their financing of carbon-intensive businesses and investing in renewables and lowcarbon infrastructure.
Managing risk is our profession. We advise customers on how they can reduce risks and minimize damages and we compensate those who have suffered losses. With a view to climate change impacts, this means both incentivizing preventive measures and compensating customers, for example, if their harvest was lost because of drought or the supply chain interrupted by floods.
In June 2015 leaders of the Group of Seven industrialized nations committed to extending insurance services to 400 million people in developing countries who are most vulnerable to the impacts of climate change. Together with the Munich Climate Insurance Initiative, Allianz and other insurers are developing ideas and tools to tackle this ambitious goal by 2020. Public-private collaboration will be key. For example, in many cases only local governments can provide the data needed to design products such as flood insurance.
Insurers can also foster adaptation and risk reduction by making insurance cover conditional on the client taking certain measures to mitigate risks, which in turn helps to keep premiums at acceptable levels. It is clear that no stakeholder alone can succeed in solving the challenges of climate change:
insurance can and should be a complementary mechanism in a wider framework of adaptation and disaster risk reduction.
Now is the time to shift. Some US$90 trillion will have to be invested globally in the next 15 years to maintain and upgrade infrastructure in energy, cities and agriculture, according to the Global Commission on the Economy and Climate.
Those investments will be in assets that we will use for the next 30 or 40 years or even longer. We must invest green today to make sure our planet does not overheat in decades to come. Otherwise, as President Barack Obama of the United States of America has said, we would ‘have to devote more and more and more of our economic resources not to growing opportunity for our people, but to adapting to the various consequences of the changing climate.’
But where will the money come from?
Governments are slashing investment budgets in attempt to bring public debt burdens under control. Banks are discouraged from investing long-term since they rely on short-term funding from deposits and money markets.
Insurers are different. They collect capital from policyholders and usually hold it for a long time, which makes them natural longterm investors. Climate-related investments such as renewable energies normally last atleast 20 years and are an attractive growth market. They can help insurers diversify their investment portfolios and provide sound and stable long-term returns. Allianz, for example, aims to at least double its investments in renewables in the mediumterm from 2.5 billion euros (US$2.7 billion) currently. To encourage the massive scale of investment needed, we urge governments to provide regulatory stability for low-carbon investments.
As professional risk managers we have to take climate change seriously, not only on our own but jointly with all our clients.