“Shall we invest in projects that get us deeper into this crisis?
Or in the solutions that could get us out of it?”
Sir David Attenborough in Our Planet: Too Big To Fail
from a speech at the COP26 Private Finance Agenda, London (2019)
We are already feeling the effects of a 1°C rise with more heatwaves, floods and droughts, more intense tropical cyclones and longer wildfire seasons around the world. The frequency and severity of these events is increasing and shows how quickly pockets of the world can become uninsurable. The wildfires in Australia in 2020 showed that a climate issue can quickly turn into an ecological catastrophe causing damage and devastation on a scale not seen before.
In recent years, the London Market has absorbed multi-billion losses from hurricanes and wildfires, while domestic insurers in the UK paid out more than £540m for the winter storms in 2019 and early 2020. Research by Swiss Re Institute shows this is just the tip of the proverbial iceberg. They predict G7 countries will see nearly $5tn wiped off their economies within 30 years if temperatures rise by 2.6°C and economies of wealthy countries will shrink by twice as much as they did in the Covid-19 crisis if they fail to tackle rising greenhouse gas emissions.
On a practical level this also matters because these changes have a significant impact on the ability to price future risk and ensure long-term sustainable investible returns. For insurers, more intense climatic events will likely lead to a dramatic increase in pay-outs and rising premiums, putting increasing pressure on the solvency of individual firms and broader pools of financial capital. For investors, this may lead to a rapid devaluation of certain assets, as they become ‘stranded’ over time.
As has been repeatedly stated by economists and academics, it will be “much cheaper to spend money on trying to curb emissions than to pay for the impact of the resulting climate change”. Significant investments need to be made to keep us in the safe zone.
The good news is that there is increased awareness in the sector about climate change and nature loss, and there are many people working within and outside the sector to ensure this awareness translates into the urgent action required to safeguard our future.
Insurance and long-term savings providers are crucial on this journey. Your long-term investment horizons and de-risking investment practices can turn the tide for our planet. You can ensure that what you are investing in maintains the integrity of the natural world upon which our global economy is based and that we are building resilience into the future that we all want to retire into – and one we want our children to inherit.
If we are to get our planet to a safe operating space we need to roughly halve our global emissions every decade. This means a reduction of half by 2030, then again by 2040 and then reaching Net Zero by 2050. At the same time, we need a global recovery of nature and biodiversity.
The past year has seen a flurry of voluntary pledges and commitments from UK companies and financial institutions, and we welcome these commitments. However it is vital that these commitments are science-based, measurable, and given a deadline that matches the urgency required. There are still far too many laggards who haven’t yet made any commitments and the majority of the existing commitments haven’t been followed through with a concrete plan on how to get there. This is a collective responsibility and one that calls for collective change. Here is some help on how to cut through the jargon and set meaningful commitments.
We very much look forward to the roadmap the ABI are launching and hope it will be the basis for bringing the whole insurance and long-term savings sector to the table. Please help your peers and champion the policy changes that are needed to ensure we make the transition together and in time. Sadly, we will all be undone by the ones who refuse to act in line with the science.
In June, WWF and Greenpeace UK published a report on the financed emissions caused by the UK finance sector. The research showed that companies and projects financed by a subset of the UK finance sector (10 banks and 15 asset managers) were responsible for the equivalent of 1.8 times the annual net emissions of the UK in 2019. If these entities were a collective country, they would be ranked the 9th biggest emitter of carbon dioxide (CO2e) in the world – ahead of Germany.
The figures are stark – but even these only tell part of the story. The market leading methodology (PCAF) used to do the analysis does not yet include insurance or securities underwriting, meaning the 1.8 figure doesn’t cover the entirety of the finance sector and is in fact a significant underestimate of the sector’s true impact. But it does show that what is currently being financed is at odds with the rhetoric of a green and fair transition.
To truly address the scale of this challenge, all ABI members must ensure their activities are not causing more of the destruction of nature and driving us further into the environmental crisis. You have access to vast amounts of capital, which can be invested at scale in the low carbon economy, so you can direct the course we follow.
Given the scale of the challenge, it would be a missed opportunity to just tinker around the edges with a few green products. These products will certainly pave the way, but they can’t remain niche while the rest of your investments (or products) are ‘business-as-usual’. We need to move to a position where all mainstream financial products are sustainable, funding a greener, fairer economy that leaves behind fossil fuels, damaging industrial agriculture and financed deforestation. Aligning your financial flows to support the Paris Agreement and a 1.5°C future is essential because what you fund will help us accelerate the journey - for better or for worse.
Much media attention has focussed rightly on fossil fuel investments, but long-term investors and asset owners also need to remember that the food system contributes up toone third of global emissions. Long-term investors should also seek to remove risks from agriculture and deforestation from their portfolios which will significantly also improve the resilience and long-term health of our planet.
Nature is our ally in tackling the climate crisis. With its vast ability to store carbon and cushion us from shocks such as flooding, nature can be a true climate hero if we let it. So, reversing its decline and supporting its recovery must also be at the heart of our plans while we’re drastically cutting our emissions.
Ahead of COP26, aligning the UK finance sector with our net zero and Paris Agreement commitments is a huge opportunity to show true UK leadership on climate action.
This is an immense challenge, but it’s also a really exciting one – the private sector has always been at the forefront of innovation to solve complex problems. As hosts of COP26, the UK has the chance to ensure that the UK’s finance sector leads the world to a cleaner, more sustainable and stable future. The ABI can be at the forefront of that movement making the UK an example for others to follow.
If you want to hear more about the solutions we need, please join our CEO Tanya Steele at the ABI's Climate Change Summit on the 7th July.
To get your colleagues engaged on making a difference, consider screening one of the two business films to your colleagues. Our Planet: Too Big To Fail tackles the impact of investing-as-usual and Our Planet: Our Business talks more about the Anthropocene. Here's how you can run a screening.