If we are to avoid the worst effects of climate change we must align finance with the needs of a sustainable economy. For, whilst much focus is on government spending and multilateral aid budgets, these are dwarfed by the approximately $300tn that is traded on the capital markets. If we can harness this $300tn to support, rather than undermine, sustainable development the effect will be transformative.
As arguably the world’s largest industry, the insurance sector has a central role to play. Insurers are uniquely exposed to climate risk. As extreme weather events increase in frequency and severity, it is the insurance industry that foots the bill. The ABI estimate that the global insurance industry’s exposure to weather-related loss has increased to $200bn, a four fold increase in 30 years. Similarly, insurers’ investments in the capital markets are exposed to climate risk, such as through stranded assets. Indeed a study by the Economist Intelligence Unit estimated that there is $43tn of value at risk from climate change. This gives insurers a strong commercial incentive to mitigate climate change.
Insurers are also uniquely placed to promote climate mitigation. For example, insurers can invest their huge sums of capital into renewable energy projects. They can also choose to divest from fossil fuel companies, thus depriving them of an important source of capital. Similarly insurers can refuse to insure fossil fuel extraction such as coal mines. Without insurance such projects become unviable. Insurers can also promote mitigation and adaption through its products such as by incentivising customers to make their homes energy efficient, to drive their cars less, and to not build on flood plains. This creates a virtuous circle in which the insurers risk is reduced, customers benefit from lower premiums and climate change is mitigated. In addition insurers can use their considerable size and influence to engage governments in support of pro-climate policies.
This pivotal role of insurers has led some environmentalists to assign great hope on the industry driving climate action and providing a much needed counter weight to the might of the fossil fuel industry. Groups such as ClimateWise and the Principles for Sustainable Insurance are testament to the industry’s growing engagement with the issue. But whilst many insurers are leading the way the industry’s response isn’t uniform and, according to some environmentalists, isn’t commensurate to the scale of the challenge. Certainly, if we are to achieve the targets of the Paris Agreement, greater ambition is needed, not just from insurers but from all sectors. As the world’s risk managers the insurance industry must do more to utilise its position of influence to mitigate the greatest risk of them all- that of climate change.