Extreme weather gives rise to a growing carbon footprint through increased material and energy usage when things that have been damaged are repaired. One could see insurers, reinsurers, and state-run natural perils protection schemes take a stab at how to ensure that the negative climate impact from the extreme weather event itself is minimized. Tools such as sustainable claims settlement with greener repairs, correct pricing of carbon risk, and funding of carbon removal projects could be included in today’s (re)insurance schemes.
It’s important to distinguish between carbon offsetting and carbon removal, because they offer two very different outcomes when it comes to reaching net zero. Considering the climate crisis we’re facing, it’s clearly not enough that businesses just pay others to avoid emissions in their place, because emissions still enter the atmosphere and remain there. If we want to reach net zero fast enough, carbon removal is needed.
Only 15% of the respondents to the WEF annual risk report feel positive about the outlook for the world. In hindsight of Covid-19, almost all material risks have significantly increased in the perception of this influential group of decision makers.
It’s interesting to note that Climate action failure is now clearly the number one risk both in the medium and long term, whilst Extreme weather is on top of the list for the short term.
Given the challenges the world is facing in reaching net zero, it’s great to see that many large insurance companies are showing leadership and setting strong examples by disclosing ambitious climate goals.
Forerunners will be in a unique position to meet the needs of stakeholders and attract new customers through public disclosure of emissions, progress toward climate targets, and demonstration of environmental stewardship.
As the demands for climate action intensify, insurers are also stepping up their game and trying to find pathways towards net zero. When we talk to people at insurance companies, their concerns and hindrances on this topic largely stem from a sense of lack of alignment. In this article we will briefly discuss each alignment challenge and propose some solutions on how to handle them.
ESG and sustainability in general is a broad topic covering much more than just climate related questions. We would argue, however, that of all the potential sustainability related ambitions, combating climate change must be the most important one. Our vision is that the global insurance industry will reach net zero emissions in 2040. Therefore, while we think it’s important and commendable that insurers adopt the Principles for Sustainable Insurance, we also recommend that insurers seek out and implement additional frameworks that have a more climate specific agenda.
We fully agree with BCG’s assessment that insurers have a great opportunity to become leaders in the climate fight due to their expertise in assessing and taking risk. We were also happy to see that they had identified several impact opportunities for insurers, which largely overlapped with the opportunities we’ve described previously. To seize the opportunity, insurers must address a number of key questions and formulate a compelling climate strategy that cuts through and crystallizes – for all stakeholders – what the company aims to do.
The recent IPCC climate report is important because it is approved by 195 governments and based on more than 14,000 studies, representing the most comprehensive summary to date of the physical science of climate change. Furthermore, the report will be in the center when diplomats gather in November at a U.N. climate summit in Glasgow (COP26). Despite all the alarming facts, there are some optimistic tones in the report as well. If we can orchestrate a coordinated global effort to stop adding CO2 to the atmosphere by 2055, global warming would likely halt and level off at around 1.5°C. That would require moving away from fossil fuels starting immediately, as well as removing large amounts of carbon from the atmosphere. We believe that the financial services sector can play an important part in this endeavour.