Countdown to COP
All eyes will be on the UK this year when it hosts COP26 in November. The climate change conference will be the most significant since nations committed to the Paris Agreement goals, and it will provide opportunity for the UK to position itself as a leading centre for green finance.
To reach net zero by 2050, the International Energy Agency says emissions must reduce by 45% relative to 2010 in the next ten years. The decisions we collectively take over the next decade will therefore be critical.
Europe, the US, UK and China aligning behind emission reduction targets gives cause for optimism. Over 67% of global GDP is now covered by a net zero target. Similarly, changing economics of renewable energy, whereby solar power is now consistently cheaper than coal for example, is set to drive further investment into renewable infrastructure.
To adapt to this changing risk landscape and reflect changing customer and workforce expectations, insurers need to develop board-level strategic responses to climate change rather than dismissing it as just another regulatory compliance issue.
What role does the insurance and long-term savings industry have to play in this?
Insurers and long-term savings providers play a critical role in responding to climate change. They could achieve this by:
Building resilience and reducing losses:
Climate change increases the severity of losses caused by extreme weather events such as floods and heatwaves. In response, insurers can mitigate the impacts of climate change on society ensuring that exposed asset classes may be insured for longer.
Through the design of new insurance products and services, insurers can also encourage customer behaviours that limit losses. Offering cheaper premiums to those who have invested in sustainable solutions, like hail-resistant roofing, could achieve this.
Insurers can also look to reduce the carbon footprint of their own operations and supply chains, for example in claims fulfilment where replacements or repairs could build more resilience to both physical and transition risks.
Driving the transition through expertise and investment:
Insurers, brokers and modelling agencies can also catalyse new industries, such as carbon capture and hydrogen, by supporting government and the private sector to build greater resilience when planning new housing projects and infrastructure.
Similarly, as institutional investors managing over £1.7 trillion of assets, the UK insurance and long-term savings industry has significant firepower to finance infrastructure projects that support decarbonisation. Adaptation to a low carbon economy requires infrastructure investment of $6.8 trillion each year until 2030, according to OECD estimates. By investing in green bonds or sustainability-linked loans, insurers can support this transition.
Where to start?
To understand climate change exposures in their existing portfolios or design products and services that meet the needs of a decarbonised economy, insurers need data. One solution is to encourage policyholders to provide increased transparency over their climate change risks and opportunities through better reporting. This is supported by the Taskforce for Climate Related Financial Disclosures (TCFD) recommendations encouraging companies to consider the impacts of climate change on their business.
At KPMG, we’re working closely with our Climate Change and Decarbonisation Strategy team to help our clients identify and source data on current exposures. We’re also supporting them in understanding what a carbon neutral pathway might look like and devising strategies to rebalance portfolios, targeting opportunities for growth and resilience. We’d be delighted to share our learnings from supporting our clients in their journey.