The conference in London heard that insurers should use their weight as investors to 'wrap their arms around' high emitting companies
Insurers are in a challenging position from an investment perspective, because it is not always clear what investments will have the most beneficial impact in the low-carbon transition, John Scott, head of sustainability risk at Zurich Insurance, said in a keynote speech to open the conference.
“One of the challenges [comes when] we as insurers must invest in green things – the question is, what’s green?” Scott said.
“Part of the challenge is because governments are not clear about their policies, so it’s very difficult for us as investors to know what to invest in. For example, the French think nuclear power is green… but Germans think it’s the devil and shouldn’t be considered part of the solution.
“The converse is that one of the things we typically invest in as insurers is longterm debt. When you think about some of the technology shifts that need to happen, from an equity point of view, they need to be financed [through] private equity – it’s more difficult for insurers to use our balance sheets in that way.
“On the brown side of the taxonomy – and although it sounds counter-intuitive – collectively, as investors, risk managers and underwriters, we need to wrap our arms around [high-emitting] companies and help them make this transition,” Scott said. He also voiced a concern that liability risk can be easily overlooked, in that it “tends to get folded in to transition risk… but it’s still a massive risk.”
Paddy Arber, senior analyst of global public policy at Aviva, claimed the insurance market is currently “broken”, in terms of how it is incentivised to address climate change.
Arber called on regulators and policymakers to step up their actions to encourage the industry to better integrate climate considerations into both their underwriting and their investments.
“The presence of regulators and supervisors in this space is incredibly powerful. As soon as the [Bank of England’s] Prudential Regulation Authority starts asking questions about climate change, everyone in the building gets interested, and it moves from being a niche area of interest that’s a long way in the future.”
He added that policymakers also need to bring in more measures to adversely impact the pricing of fossil fuel investments.
Mark Cornelius, head of major life groups at the Prudential Regulation Authority, said: “No firm can escape looking at climate change as a risk.”
Cornelius said, in his personal opinion, a punitive capital charge for brown assets makes more sense than a green supporting factor because he was not sure that the green assets were less risky.
He added that the Network for Greening the Financial System, a group of international regulators and supervisors set up a year ago, will explore this issue.
Miroslav Petkov, a director of sustainable finance at S&P Global Ratings, said the onus is on policymakers to give clear signals to make green investments more profitable, which would help attract investment.
Meanwhile, Kajetan Czyz, programme director for sustainable finance at Cambridge Institute for Sustainability Leadership (CISL), revealed that the organisation is to launch a modelling tool to assess how the transition to a lowcarbon economy will impact the financial performance of infrastructure investments.
The open-source tool, which will be launched in 2019, will assess transition risk at an asset level.
Peter Bosshard, finance programme director at The Sunrise Project, revealed the findings of a report that assessed the policies of the world’s 24 largest re/insurers on insuring and investing in coal.
Bosshard said the momentum of insurers away from coal is encouraging, but highlighted the fact that US firms are taking little action to limit their exposure to coal.
Major European firms were highly praised as many of them have placed restrictions on coal business. Swiss Re was ranked in first place both for its underwriting and divestment policies.
The Insurance and Climate Risk conference was hosted by Environmental Finance and its sister titles InsuranceERM and Insurance Asset Risk.