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Pillar Four: Helping Society Adapt

Background

Alongside the commitments relating to our sector’s own activities and operations (set out in the first three pillars of our Climate Change Roadmap), ABI members can also play a wider role in helping the customers and stakeholders that we work with adapt to a changing climate.

This means both helping customers make decisions that will reduce their own carbon footprint and also helping customers with the economic and societal changes that will arise as a result of climate change.

We want to focus on the key ‘touchpoints’ that our industry has with customers, clients and stakeholders – and make every one of these as sustainable as possible.  

On top of the innovative products that will come from individual ABI members, the growing insurtech community and potentially from new entrants into the sector, there are some key areas where we believe our sector can have a unique impact.

Progress Update: What has been achieved in 2021/22

Since we published our Climate Change Roadmap in July 2021, the Government has produced a significantly clearer picture of how it proposes to meet its Net Zero targets – which in turn allows our sector to identify the actions we should prioritise more clearly.

ABI members are taking a range of actions to help their customers make more sustainable choices and navigate the growing number of ‘green’ choices available to them.

Examples of support that ABI members are offering to their customers include:

  • A group of ABI members are among the first set of firms to offer homeowners the chance to install Property Flood Resilience measures (up to the value of £10,000) when repairing their properties after a flood, as part of Flood Re’s Build Back Better initiative.
  • Pension providers are simultaneously integrating climate change and ESG factors into default funds and also developing a range of tailored sustainable funds customers can choose.
  • ESG online tools and calculators that allow savers to make informed decisions about the carbon impact of their investments
  • Developing tailored insurance products for Electric Vehicles and incentives for more sustainable driving within existing motor insurance policies
  • Incorporating ‘Green Parts’ when settling motor claims (rather than always using brand new parts)
  • Providing tailored information on EPC ratings and how homes can be improved to become more energy efficient, and provision of smart devices and sensors to help people reduce energy use
  • Risk management tools aimed specifically at SME customers

The UK Government’s Net Zero Strategy (published shortly before COP26) builds on the previous 10 Point Plan for a Green Industrial Revolution.

The independent Climate Change Committee (CCC)’s assessment of the Government’s Net Zero strategy is broadly positive –

“a credible package that reflects the scale and breadth of the challenge. It is a material step forward… (The commitments in the strategy) send strong signals to businesses, investors and consumers… (and contain) credible mechanisms to drive delivery and rapidly scale up private investment.”

This has allowed the ABI and our members to take forward a range of workstreams aimed at increasing our sector’s potential to drive sustainable behaviours. These include:

  • Supporting the FCA’s work on Investment Labelling and Disclosure as part of helping savers understand the environmental impact of their pensions – the ABI provided a detailed response to the FCA’s discussion paper on Sustainability Disclosure Requirements (SRD) and Investment Labels and a number of ABI members are part of the FCA’s Disclosures and Labels Advisory Group (DLAG). We are supportive of the proposed three-tier approach but want to ensure all customers are able to understand and engage with the descriptors chosen. We also want to see this regime adopted as broadly as possible, so that its requirements apply across the full value chain (including financial advisers). Regulation is just one part of this and ABI members have been active in raising awareness amongst the wider public about the impact their savings could have, working in collaboration with the Make My Money Matter campaign, with research showing that choosing a sustainable pension has 21x more impact that other lifestyle changes having been provided by Aviva.
  • Ensuring the Bank of England’s CBES (Climate Biennial Exploratory Scenario) provided meaningful evidence on societal climate risk – the ABI worked closely with our members to ensure that the 9 ABI member firms participating in this exercise were well-placed to respond to the CBES, and that – where appropriate – the wider sector was able to learn from the experience of those firms participating in the exercise. Although this was not a formal ‘stress test’, each firm completed an extensive data collection, covering either their investment counterparties (for long-term savings providers) and underwriting portfolio (for insurers), and then provided extensive qualitative and quantitative analysis, involving Board-level scrutiny and extensive senior management expertise. As PRA CEO Sam Woods acknowledged, “ ‘overall, this is a good news story: [the Bank was] encouraged by the progress firms have made”. However, the CBES findings also demonstrate that our sector must continue to evolve and enhance its capabilities in managing climate risk. The findings also underline the importance of sustained collaboration between Government, industry, financial regulators and the real economy – it is clear from the findings that the risks to the financial sector linked to climate change cannot be managed without careful co-ordination of the transition to Net Zero across the whole economy. You can read a detailed analysis by the ABI on the CBES findings and their implications for our sector here
  • Preparing for the insurance market to help deliver the Government’s ambitions on low-emission vehicles and energy efficient properties – both of these areas will shape how the motor and property insurance market develops over the next decade. We have already had detailed discussions on these issues with a range of stakeholders and hosted a break-out session at our Annual Conference to discuss how these markets will develop, with speakers from three ABI members, the Green Finance Institute and Flood Re. In 2022, we have established two dedicated member working groups to consider these issues in depth with industry experts. 
  • Developing innovative product offerings to manage climate risk and promote sustainability – there are already a growing number of tailored insurance solutions designed to mitigate or address the impact of climate change. Some of these are showcased on the ABI’s own Sustainability Hub. In addition, over the past 12 months, the ABI has collaborated with a range of initiatives that aim to increase the uptake of such product offerings. Examples of these include ClimateWise’s paper on Product Innovation within the Insurance Sector and the work of the Sustainable Markets Initiative’s Insurance Task Force to produce a ‘Products and Services Showcase’, for which the ABI sat on the working group that contributed to the paper.

Actions for 2022/23: Where more progress is needed

Engaging customers and savers

Effective implementation of the FCA’s proposed labelling regime for green investment products will help our sector meet its goal of maximising the impact of saving for retirement on tackling climate change.

We would also like to see more action to make reports compiled under the UK Stewardship Code readable and accessible for as broad a range of stakeholders as possible, along with more support for smaller firms in compiling their Stewardship reports. The ABI supports the aims of the Taskforce on Pension Scheme Voting Implementation and remains committed to working with the wider sector to take this forward.

In addition, we want to work more closely with the FCA to ensure that the wider regulatory environment is aligned with the climate agenda, but also that they allow flexibility for product offerings to develop in line with the wider transition.

Several ABI members are already working with Make My Money Matter to drive this engagement agenda and we want to build on that relationship. In June 2022 (shortly after our Climate Summit and the publication of this update), Make My Money Matter’s CEO Tony Burdon will be addressing our Long-term Savings Committee, comprising leading pensions and savings providers from across our membership.

Aligning sustainability with tackling the cost of living and energy security

Since we published our Roadmap in July 2021, the Government has set out a package of measures to support people across the UK with the cost of living and introduced a new Energy Security Strategy.

The impact of the conflict in Ukraine on energy prices and rising inflation both emphasise the importance of doing all we can to make the transition to a Net Zero economy stable and affordable – meaning that the fourth pillar of our Climate Roadmap has only become more important in the last year.

We are committed to doing all we can to align our work on Climate Change with our broader focus on delivering better outcomes for our consumers.

This year, we have implemented a number of measures to ensure the ABI is able to amplify the voice of consumers across our industry – including appointing Nicky Morgan as our first Independent Chair, working alongside Dianne Hayter an Independent NED. Our recently launched Consumer Committee and a new Consumer Advisory Group will drive this work forward.

In 2022/23, we will prioritise ensuring our work through the Climate Roadmap aligns with the broader principle of a ‘Just Transition’. There are a number of recommendations for how we can achieve this, for example, we want to build on the recommendations made last year by the Grantham Research Institute’s ‘Financing a Just Transition Alliance’.

As part of this, we plan to work in partnership with organisations leading research and policy innovation in this space, such as UKSIF (UK Sustainable Finance and Investment Association) and the Impact Investing Institute. UKSIF’s recommendation for a UK-wide ‘Just Transition Commission’ would be a good way to bring together different sectors on this important agenda and is something the ABI would actively support if taken forward.

Making the UK resilient to a changing climate

The damage caused by Storms Dudley, Eunice and Franklin that hit much of the UK during February 2022 is expected to lead to insurers paying out c£497 million in dealing with 177,000 insurance claims. Emergency payments to relieve immediate hardship totalled £13 million.

This overall payout figure compares to the estimated £543 million paid in storm and flood claims following Storms Ciara, Dennis and Jorge in February 2020 (claims that the industry handled while continuing to maintain operational resilience during the early phase of the Covid19 pandemic).

The Environment Agency projects that, in the UK, winter rainfall could increase by between 6 and 13%, while the sea level rises by at least 23cm – at a time when the number of properties on flood plains is projected to double.

The insurance sector is already making a major contribution to the UK’s resilience – for example, through the support offered by Flood Re and through Flood Re’s Build Back Better initiative, through which five initial participating ABI members will offer homeowners the chance to install Property Flood Resilience measures up to the value of £10,000 when repairing their properties after a flood.

However, the scale of extreme weather the UK is set to face as a result of climate change means that the costs will increasingly be faced by ‘the many’, not just ‘the few’, putting the overall costs outside of the bounds of the conventional insurance market.

These costs should not only concern the many households exposed directly to flood and extreme weather risk – claims payments on this scale represent investment that could otherwise have been diverted more productively into mitigating climate change.

Therefore, these costs must be accurately reflected and prioritised within the UK Government’s forthcoming updated Green Finance strategy, so that that the right incentives are created to deploy capital now to increase resilience and mitigate climate risks.

For this reason, the ABI is adding an additional priority on resilience to our Climate Roadmap. It is vital that the UK invests urgently in resilience. This does not just mean building new defences, but also maintaining our existing infrastructure and ensuring planning policy prioritises resilience when new developments are approved.

You can read more about how the ABI believes the Government should address flood risk within the Levelling Up and Regeneration Bill in a blogpost here.

In 2022/23, we want to build on the work we have already contributed as part of the Government’s Business of Resilience project (where we sat on the ‘Climate Risk and Disaster Finance’ subgroup) and drive forward solutions that make the UK more resilient.