3 Ways Insurers Can Lead the Way By Investing in a Sustainable Future
While understanding and managing systemic risk is the day-to-day work of many in the insurance and broader financial services industries, prior to the COVID-19 pandemic, it was an intangible concept and difficult to incorporate into daily decision-making.
The pandemic has opened the world’s eyes to the consequences of avoiding the systemic risk conversation. Now, as we face a decisive moment in our fight against climate change – a systemic risk like no other – our industry has the opportunity and the responsibility to use our expertise to facilitate the transition to a sustainable future.
There can be no doubt that 2021 has been the “Year of Climate”. From winter storm Uri in Texas and devastating wildfires in Australia, the Mediterranean and the western U.S. to flooding in Germany and, most recently, Hurricane Ida across the Gulf and eastern U.S., – extreme weather events have touched nearly every corner of the globe, leaving economic and social displacement in their wake.
And whether you’ve been directly affected by an extreme weather event or not, climate change presents significant risks to all of us if the global economy doesn’t transform into a sustainable model that can support severe environmental stresses.
In addition, climate change, like COVID-19, disproportionately affects vulnerable and disadvantaged social groups that already suffer from poor financial health and access to appropriate risk transfer solutions.
The climate protection gap is deeply concerning. In 2019, natural catastrophe events resulted in economic losses of $232 billion, yet only $71 billion of those losses were insured (according to Aon’s Weather, Climate & Catastrophe Insight: 2019 Annual Report).
To make matters worse, the increased volatility and severity of weather events means that insurance may become more expensive, and those who cannot afford it will likely continue to go without it, leaving private lenders and governments to assume greater financial risk.
In December of last year, Lloyd’s published our first environmental, social and governance (ESG) report, setting out steps to align our decarbonization approach with the United Nations’ Sustainable Development Goals and the Paris Agreement. The aim going forward is to integrate sustainability into every business activity, from the underwritten risk to the investments we make.
Among the underwriting decisions we’ve taken are phasing out coverage for thermal coal, oil sands, and Arctic energy exploration activities by 2030. On the investment front, Lloyd’s Corporation will set a roadmap for transitioning our own operations to net zero by 2025.
We’re also developing guidance on impact investing for participants in the Lloyd’s market as they develop responsible investment strategies.
The insurance industry is uniquely positioned to lead the world toward a greener future. In July, Lloyd’s published a climate action roadmap that sets out how our industry can partner with others to mitigate the climate-driven changes we all see coming. The roadmap suggests three primary ways our industry can help:
Directing capital toward climate-positive solutions. First, the insurance industry must begin to better integrate ESG considerations into investment decisions, directing an increasing share of its more than $30 trillion in assets under management towards climate-positive solutions and products.
Working with governments and investors to provide financial structures to support disaster response, recovery and resilience. It is critical that public-private partnerships play a role in protecting people against climate-related disasters. As with the pandemic, the sheer immensity of the climate change challenge requires a coordinated effort in moving to a more sustainable, net zero economy.
Innovating with new products and solutions that support the transition to renewable energy. Innovation in the energy sector requires parallel innovation by insurers.
Two current areas of focus that support sustainability initiatives include risk transfer solutions for the rapidly advancing global offshore wind market and the deployment of green hydrogen as an alternative fuel source.
With experience gained over many decades of providing financial support to businesses and communities in the face of increasingly severe and frequent weather events, the insurance industry has a unique and critical role to play in tackling the climate crisis.
As risk managers, risk carriers and investors, we’re better positioned than anyone to work with our customers, legislators and regulators to develop the innovative products and services needed to support the decarbonization of economies around the world. &