A pall of science-based pessimism, empty political rhetoric and corporate hubris hangs over the COP26 talks getting underway in Glasgow. Although academics broadly agree that it might still be possible to limit the global temperature rise to 1.5°C by the end of the century, few believe it is likely. At the same time, bowing to economic and political influences, governments continue to favour distant CO2 objectives over taking action.
Similarly, high-emitting industries are criticised for ramping up emissions as the post-pandemic recovery takes hold – while publicly backing the UN’s ambitions.
A new report from Systems Change Lab* finds that across 40 different areas spanning the power sector, heavy industry, agriculture, transportation, finance and technology, not one is changing quickly enough to achieve the Paris Agreement’s goal.
Its report translates the transitions required to avoid the worst climate impacts into 40 targets for 2030 and 2050, with measurable indicators. Of the 40 indicators assessed, none are on track to reach 2030 targets.
Insurers on the rack
Insurers find themselves in a uniquely challenging position and face a steeply rising climate risk profile. More litigation among their clients and stakeholders, plus greater regulation, is accelerating down the track. At the same time, pressure is growing for insurers and brokers to do more to influence the behaviour of their insureds, as well help build in resilience.
Nigel Brook, who leads on climate change at law firm Clyde & Co, believes that COP26 will be a turning point for litigation. “Three quarters of all climate change litigation is against governments, which has a bearing on companies because if governments are ordered to adopt more ambitious climate policies, they will put pressure on businesses,” Brook told GRM.
“We are also seeing growth in litigation against companies. A case against Royal Dutch Shell in the Netherlands argued that the company’s climate action plans constituted a failure in its duty of care to citizens. It led to a court ruling in May mandating the company to reduce its CO2 output by 45% from 2019 levels by 2030,” Brook adds.
In September, German activists filed a lawsuit against automakers VW, BMW and Daimler, seeking to force them to tighten their carbon-emissions goals – the first time German citizens have sued private companies for exacerbating climate change.
“Legal action will be an issue for carbon-intensive sectors primarily, but companies and individuals in other sectors could also be held to higher standards, including pension trustees,” Brook said. “We may well also see more litigation by companies or their shareholders against directors, for example for decisions that don’t take proper account of climate-related physical or transition risks.”
Mandatory climate risk reporting
Insurers and insureds alike are coming under more pressure to identify and disclose elements of climate in their business. Even regulators in the US now recognise climate change as a threat to financial stability. This month, the Financial Stability Oversight Council (FSOC) issued a report calling for climate-related disclosures by companies, beefing up climate expertise at agencies, and building tools to better model and forecast financial risks, such as scenario analysis.
In the UK, the Prudential Regulation Authority (PRA) has mandated all regulated insurers with the requirement to embed an approach to managing climate-related financial risks by the end of 2021. This week, it warned that next year it will actively supervise to ensure firms meet expectations, “with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis”.
Further, the Task Force on Climate-Related Financial Disclosures, created in 2015 by the Financial Stability Board, has developed a framework for consistent climate-related financial risk disclosure. The PRA is actively encouraging insurers to engage with the recommendations of the TCFD and some formalised disclosures will soon be mandatory.
Underwriting climate risk
The floods around Glasgow underline how frequent and more severe cat events are an immediate climate risk concern for insurers. As a new report from Howden points out, the (re)insurance market has suffered an unprecedented run of $10bn plus weather-related losses in real terms since 2017, with the number of events (12) more than double anything seen in previous five-year periods.
Beazley’s Chris Illman, head of responsible business, agrees: “We are already seeing a significant impact from secondary perils, such as wildfires, the Texas big freeze or the inland impact of hurricane-force winds and, in collaboration with stakeholders, we need to begin to address how we deal with these problems in a sustainable way that protects clients for the long term, he says.
“At the moment, these events are suffering a significant protection gap, for example only 50% of 2021’s European flood damage is estimated to have been insured. Beyond physical damage, the financial implications of the transition and liability risks of climate change are also significant, both directly for insureds as well as within their supply chains. Ensuring our clients manage these additional risks that climate change poses is important to us, as is being able to support them in their transition to net zero.”
Along with other insurers, Illman says he will be closely following the COP26 talks to better understand and support the conference’s net-zero ambitions.
“Beazley recognises that making demonstrable progress to combat climate change, as well as a wider range of environmental, social and governance, issues is essential if our planet is to have a more sustainable future. We want to support our clients and partners as they transition to a decarbonised future and continue supporting communities impacted by climate change-related natural catastrophes.”
Reconciling their own climate risks and at the same time helping clients mitigate theirs might prove to be a difficult balancing act for carriers like Beazley. But compared with other COP26 participants, public and private, the industry has the reach, resources and leverage to make a big difference.
Ultimately, the insurance industry doesn’t have a choice, Brook believes: “For insurers, climate change risk is pervasive in their business; there is no safe haven from it. The only sustainable way to mitigate the risk is to be part of the solution.”
*Written by the UN High-Level Climate Champions, Climate Action Tracker, ClimateWorks Foundation, Bezos Earth Fund and World Resources Institute