Insuring a Sustainable Future

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.


5 thoughts on “Insuring a Sustainable Future”

  1. Thanks for your post. Insurer’s certainly do have a part to play however a couple of thoughts as to maybe why they are not there in unionism yet for your viewpoint – remuneration of their key decision makers continue to be short term compared to say if their bonuses had to be delayed for say 5 years and held in the companies stocks until the payment date. Maybe this would help drive some long term thinking ? The very nature of insurance relies on people expecting an unintended event to occur and being able to access funds accordingly – what does this do to their business model if as a result of investing in sustainable outcomes they reduce the risk of these unintended events occurring and hence reduced overall need for policies and therefore reduced capital coming into the organization and shareholders receiving a reduced return ? Maybe the model needs to be disrupted to have a true impact on achieving a sustainable future ?


  2. I think there are other aspects at play which makes the insurance industry a crucial part of the response to climate change and the transition to low carbon technologies.

    The first that I would highlight is partnership. The insurance industry is extremely good at spreading risk across the industry so that no one firm is left shouldering too much risk. This cascade of risk means that the narrative around climate risk has spread through the industry much faster than a similar narrative in another industry might. This is a strength of the industry in dealing with climate change and why ideas about things like stranded assets have become understood so quickly.

    The second point I would make is that of advocacy. Insurers have deep pockets and significant influence over policy making and governments are increasingly nervous about shouldering the risk of the impacts of climate change without the support of the private sector. Advocacy is also important because risk is subjective and requires other actors to set risk factors. For example politics can change the course of policy and can change risk such as the risks associated with fossil fuel investments, but insurers can keep governments honest by ensuring that while political narratives around climate risk change, the narratives of risk remain consistent and constraining the politicisation of the debate.

    Insurers also have a crucial role in pricing investments and risk attached to new technologies and markets that are supporting the low carbon transition. In the U.K. at the moment we have something of a Mexican standoff between government and industry over the low carbon transition of vehicles. Government wants to support the transition, but doesn’t want to foot the bill, while vehicle manufacturers and infrastructure companies (grid, refuelling companies, local councils) are looking to ensure they don’t over invest too early in a way that might expose them to a lower return on either their legacy investments or low carbon investments. Insurers could help significantly in terms of capital flows and towards risk profiles of these new technologies.

    Thanks for your post and I hope these are useful reflections.


  3. Very insightful post about role of insurance sector and how it could help to drive towards low or no carbon economy. It is really inspiring that insurance companies see themselves at the centre of this issue and actively engaging as an industry body to bring the change.

    One part of the blog caught my attention where you talked about insurance companies actively refusing to project that contributes negatively to climate change, making them financially non-viable. I think this could be a very powerful tool but at the same time as opposite of this could become valuable financial instruments through products such as insurance linked securities. Current trend towards low or no carbon economy would make positive contribution to the value of such securities.

    Another point to build on your post would be to consider cross sectoral partnerships with banking for developing securities products, partnership with energy companies for actively discouraging carbon heavy projects and partnership with governments that are highly impacted most by the climate change.
    Again, I really enjoyed learning your blog and learn about insurance sector initiatives.


  4. The points you bring up regarding the insurance industry potential influence in significantly reducing climate change are quite impressive. I believe we often forget how large the insurance sector is and the positive impact these organizations can drive. Further expanding on how exposed the insurance companies are to climate risk they are uniquely vulnerable to a myriad of environmental, social, and governance (ESG) issues; additionally, human rights challenges are particularly relevant to the insurance industry. Given that a large segment of the population still does not have adequate access to insurance; mitigating, adapting to, and building disaster resilience will rely on multi-stakeholder partnerships that will assist in propelling the insurance industry toward sustainable development. Increasing global warming has already made it exceedingly difficult for the insurers to cope with a growing number of climate-related natural disasters, some in areas not traditionally prone to climate risks.

    The insurance industry finds itself in quite the predicament as several policies cover copious assets that facilitate the increase of global warming, such as coal plants, natural gas facilities, livestock agriculture and other fossil fuels producing initiatives. For this reason, I’m not confident that the whole insurance industry understands the manner in which it should proceed to ensure that their long-term strategies are appropriately aligned to resist climate change. For anyone in the industry, I would recommend not only addressing but defining what they believe their role and framework should be to support sustainable development and then proceed to align their business practices within the confines of this strategy.


  5. Thanks for the comments Calvin. You’re absolutely right that the industry doesn’t fully understand the full nature of the problem or how to respond. Some insurers are definitely leading the way. A report this week from the Asset Owners Disclosure Project ranked insurers on their response to climate related risks and opportunities. It ranked Axa and Aviva as the two best performers but, worryingly, it found that nine out of ten investment strategies in the sector fail to align with the Paris Agreement. All but three US insurers have no plans to decarbonise their portfolios at all. A separate report by the Environmental Audit Committee this week found that some of the biggest pension schemes are “worryingly complacent” about climate risk. Given the significant exposure that insurers have to climate change it is hugely disappointing, and i would argue almost unfathomable, that they are not doing more to address the issue.

    One issue with pension funds in particular is that pension savers rarely ask their pension provider to ensure their pension is invested sustainably, Often savers have no idea that their savings are invested at all and this lack of demand drives the lack of action from insurers. People should be encouraged to write to their provider asking for a sustainable pension- Share Action’s website is a useful tool to encourage this.

    One avenue that is also worth exploring is how insurers engage with public policy to advocate ‘pro-climate’ policies. For whilst insurers may find it difficult to alter their investment decisions due to concerns about fiduciary duty there is very little to prevent them engaging with policymakers, and in so doing provide a much needed counter weight to the might of the fossil fuel industry. It is unclear to what extent the industry currently does this and i will therefore be researching the issue for my MSt dissertation.


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