As we approach the end of the year the ABI is beginning to look ahead to 2022, which is already shaping up to be a busy one. In no other policy area is this more true than for the world of climate change: whether it is government policy, regulatory expectations, new demands from customers or firms considering the existential threat to their business model, both the flurry of activity is encouraging and the challenge daunting. The insurance industry is increasingly demonstrating its ability and desire to take up arms in the battle against climate change, but there is no room for complacency. Joining the race to net zero is no longer optional and it is by working together that this industry will achieve change.
It was with this fighting spirit and cautious optimism that myself and colleagues from the ABI joined COP26 last month in an unseasonably sunny Glasgow. As someone who started a new job one week into lockdown and is still only just meeting colleagues in person, the simple pleasure and value of meeting people in the flesh is not lost on me. I’m confident that everyone who was lucky enough to make it up to the Green or Blue zones at COP26 would agree that the air of energy, motivation and urgency is something we will all be taking home to our regular places of work.
Regulators embraced the COP spirit by producing an impressive series of new announcements and proposals. When it rains it really does pour, but such is the nature of climate change. From the FCA’s announcement on its ESG strategy and the sustainability labelling of financial products, to the PRA’s Climate Adaptation Report outlining the possibility of capital requirements to address the consequences – financial risks – of climate change, the government’s transition plans requirements, and the FCA’s rules for the new Long Term Asset Fund (LTAF). With the raft of consultations over the coming months, the ABI will be fully engaged to advance our sector’s contribution in the fight against climate change.
And then there is Solvency II. While the fundamental principles are sound, key elements of the rules, especially aspects of the Risk Margin and Matching Adjustment, constrain insurers’ ability to invest in support of the transition to net zero. This is especially true for long-term illiquid investments in green technology and infrastructure that the government has prioritised. We have always supported a robust, risk-based approach in the interests of policyholder protection, but it is also important to recognise that capital regimes have a wider impact on public policy and that, as recognised in HM Treasury’s objectives for the Solvency II review, enabling insurers to support economic growth and the transition to net zero also needs to factor into the design and calibration of the regime.
ABI members are ideal long-term partners for investment towards net-zero: by nature of their long-term liabilities, insurers are inherently holders of ‘patient’ capital, able to hold assets over extended timeframes before yielding returns. The analogy of a supertanker is a compelling one: while insurers are slow moving, they are also very large with more than £2 trillion in assets under management. They are bound for long journeys carrying precious cargo with twenty or thirty year liabilities to invest over the long-term and by recharting the supertanker’s course by just a few degrees, this can have a big impact on the final destination. Case in point: recent research by the Boston Consulting Group (BCG) has suggested that of the £2.7tn needed to be invested in the UK’s infrastructure and energy transformation to reach net-zero targets, over a third (£0.9tn) could be contributed by insurers by 2035.
Solvency II and climate change will be the twin themes of our prudential regulation session at the ABI’s annual conference next year with the session entitled ‘The green transition: Unleashing our sector’s assets for sustainable growth’. This will be an excellent and timely opportunity to discuss the Solvency II review in the context of COP26’s unprecedented focus on the role of private finance, and what impact reform could have on supporting the transition to net zero with government, regulatory and industry representatives.