How the re/insurance industry can turbocharge the transition to net zero
Climate change poses immense risks for society and the economy. The re/insurance industry offers transformative opportunities to accelerate climate action by joining up Environmental, Social and Governance (ESG) approaches in its investments, underwriting and operations.
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If net zero targets are missed by mid-century, the world could suffer unimaginable damage from climate change. According to Swiss Re Institute research, the global economy could lose nearly 14 percent of total value by 2050 if we stay on our current course. Not to mention the impact on the lives of future generations.
Capital to fund transition is available
But how can the transition to net zero be financed when governments are strapped? The good news is that the funding needed is not insurmountable, and the benefits of investing in a green economy far outweigh the costs of inaction. According to an OECD analysis, increasing annual global infrastructure investments by just 10 percent to USD 6.3 trillion would limit average global temperature increases to well below 2°C.
Long-term investors such as pension funds, sovereign wealth funds and the re/insurance industry have the financial muscle to be a big part of the solution. Swiss Re Institute estimates the long-term investment (LTI) asset base to be around USD 80 trillion – a pool of money looking for attractive investment opportunities. ESG funds outperformed over the past ten decades, even during the COVID-19 crisis.
Swiss Re is at the forefront of sustainability developments in the industry and has demonstrated that transformation efforts benefit not only society and the environment but also shareholders. We set measurable targets to reduce our carbon footprint. This has a lasting impact on the real world:
We are aiming for a complete phase-out of thermal coal-related re/insurance in OECD countries by 2030, and in the rest of the world by 2040. We will also phase-out insurance and reinsurance cover for the world’s most carbon-intensive oil and gas companies (top 10%) by 2023.
- Investment/asset management
We commit to holding at least USD 4 billion in green, social and sustainability bonds by the end of 2024 and will reduce the carbon intensity of our corporate bond and listed equity portfolios by 35% by 2025 (with base year 2018).
We have also pledged to be carbon-neutral in our own operations by 2030. We are well on our way, already sourcing 100% of power used for our own operations from renewable sources (completed in 2020). We will continue to reduce energy intensity by an average of 2% per year, among other measures.
Partnerships and accountability
However, the actions we take as an industry need to be linked to what governments are doing because they are the ones shaping policy. As a responsible investor with net-zero targets we can have a bigger impact by joining up with like-minded companies. That's why Swiss Re co-founded the "Net Zero Asset Owner Alliance". It is now a major investor coalition with more than 40 companies. The combined portfolios of alliance members represent approximately USD 6.6 trillion in assets worldwide. All members are committed to achieving net-zero emissions in their entire asset portfolios by 2050.
This is not the time for mere promises. To achieve the 2050 target, we set ourselves interim goals every five years to keep ourselves accountable – now and along the way – and not to defer the problem to future decision-makers.
Policies can mitigate transition risks
The insurance industry has a very important role to play – by supporting the transition on the investment side, by de-risking investments in sustainable technology, and with expertise. However, the actions we take as an industry need to be linked to what governments are doing, as they are shaping policy.
It is not a lack of capital, but a lack of rules, according to Jerome Jean Haegeli, Swiss Re Group Chief Economist. "The biggest disruption cost will come from policy inaction", he notes. Clear market signals and incentives are critical to enable an orderly transition. An inadequate policy framework creates uncertainty for businesses and markets.
Swiss Re's Public Sector Solutions team works closely with governments to develop the new policies that are needed to shape holistic responses to systemic issues. Veronica Scotti, Head of Swiss Re's Public Sector Solutions, points out: "The human brain does not like to plan ahead for unwelcome experiences like disasters, but there is overwhelming evidence that effective adaptation reduces the cost of natural catastrophes by 80 percent."
The policy framework needed for effective mitigation includes
- Transparency on CO2 emissions and international rules for sustainable business. As a reinsurer, we support with data and analytics that create transparency on the risks; with geospatial capabilities like CatNet and the Risk Resilience Center.
- An adequate carbon price that reflects the true cost of global warming. Today, it is still far too low. By putting a price on climate change, we can set an important market signal. Where risk has a market price, we see risk-appropriate behaviour.
- International standards for sustainable infrastructure investments to make them more accessible. This could unlock large scale institutional investor flows. In the run-up to COP26, global economies should seize the unique opportunity to "build back better" with the estimated USD 9.9 trillion spent to combat the COVID-19 crisis.
Moreover, the transition must be inclusive, otherwise it creates new risks. Therefore, the costs of the transition for lower income groups must be mitigated.
A multi-stakeholder effort is critical for this large-scale transformation. We know what we need to do. Now is the time to act. The net-zero transition will foster prosperity if public and private sectors work together – green growth, job creation and a more sustainable economy. Swiss Re's fight for net zero and a more resilient world is much more than a noble cause. It is a clear business case and a responsibility to future generations.