German insurers ready to back green recovery but incentives and rule changes needed first

The EU Commission aims to mobilise €1trn of investment for its Green Deal over the next 10 years as part of its goal of making Europe the first climate-neutral continent by 2050. Some €500bn of the total investment will come out of the EU budget that was approved a few weeks ago. National funding and special support measures for the most affected regions will add to that. But president of the EU Commission Ursula von der Leyen, concedes that this public funding will not be enough. The project will need about another €280bn from the private sector. Jörg Asmussen, chairman of the management board at the German Insurance Association GDV, says that the German and wider European insurance sector is ready to play a big role in the private sector investment. But, in a recent statement, Mr Asmussen makes it clear that certain regulatory changes and incentives will have to be implemented to make this possible. The German insurance industry wants to play an important role in Europe’s green future but conditions need to be set first, he argues. Mr Asmussen points out that the investment portfolio of direct insurers alone comes to about €1.5trn. Many insurers already take sustainability criteria into account when making new investments – including environmental, social and governance (ESG) factors, he adds. “It’s in their own interests. Global warming poses a long-term threat to the insurance business model. If natural disaster losses were to become excessive, climate risks would ultimately become uninsurable. We should do more and we will do more,” states Mr Asmussen. The green deal actually complements developments already underway at supervisory level, which makes sense, points out the GDV. Under the current review of Solvency II, the EU plans to incorporate sustainability aspects into the regulatory framework review for the first time. That would lead to insurers including climate risks in their underwriting policy. “As a result, insurers could work with their clients in future to develop sustainable growth strategies together. Insurers would become eco patrons, if you will. They must also align their risk management and investment more closely with environmental factors,” states the recent GDV article. But, as Mr Asmussen points out, this would be contingent on the right incentives being in place. He argues that the priority is not to further complicate long-term investments. A lot will depend, for example, on how the long-term interest rate is modelled in future, which life insurers use to value their liabilities. This is inversely proportionate to reserving requirements and the lower the interest, the higher the reserves. A lower interest rate therefore leads to less equity for investments, including those that are sustainable. Germany’s insurers would also like to see a more effective volatility adjustment, allowing them to cushion short-term fluctuations in their solvency level and balance sheet. “As long-term investors – with an investment horizon of 20 years or more – they are well equipped to see out financial market excesses. Practically no other investor group can say the same. This very long-term perspective makes life insurers ideal partners for the ecological revolution. Sustainable infrastructure and energy projects tend to be long-term in nature and often not as liquid as other asset classes,” explains the GDV. But the German insurance sector is opposed to a flat-rate discount for green investments, for example in the form of a lower capital requirement: “That would go against the risk-based approach of Solvency II,” says Mr Asmussen. The federal financial supervisory authority BaFin reportedly concurs. “It would pave the way to the next crisis and harm sustainability,” BaFin president Felix Hufeld recently warned. The recent collapse of German solar manufacturers serves as a stark reminder that not even “clean” industries are immune to risk, points out GDV. The adoption of a common environmental classification system or taxonomy would also help the insurance sector play a full role in the green deal, argues the GDV. “In order for insurers to expand their commitment to sustainable investments that they will have to report in future, they need to know exactly what counts as sustainable investments. Clear-cut criteria are needed, as with the classification of foodstuffs,” it explains. This work has already started. So far, however, criteria has only been set for two of the six environmental objectives – climate change mitigation and climate change adaptation – and even then only for certain sectors. The GDV accepts that those sectors account for most of the CO2 emissions, but they only represent just under half of gross value added. “The EU Commission doesn’t plan to present proposals for applying the taxonomy to the other economic sectors before the end of 2021. Moreover, it will probably take another year to define the details of the four other environmental objectives, for example protection of ecosystems or the transition to a circular economy,” states the GDV. Another gap is the absence of guidelines for social or governance goals. “For now, we are only interested in the “E” of ESG,” says Mr Asmussen. He wants to inject some “urgency” and calls for an unbureaucratic solution that could be used as an international standard in the long term. Ultimately, the finance flows are global. “Asian investors are looking very closely at how Europe applies the ESG criteria,” points out Mr Asmussen. One huge boost to the green agenda and recovery effort from Covid-19 would be a deepening of capital markets union, removal of various hurdles and creation of a true single financial market in Europe. The GDV announcement points to a recent statement from Sylvie Goulard, deputy governor of the Banque de France, who said: “We have plenty of funds. However, what we don’t have is a single financial market.” “Differing insolvency regulations and creditor rights plus an inconsistent data pool for financial and non-financial key performance indicators also continue to hinder the monetary flow within Europe,” states the GDV. It also says that deepening the capital market would significantly expand investment opportunities for German insurers. Another important element for the GDV is EU plans to establish a new project platform to mobilise private capital and offer consulting services to project developers and investors, as it did with the Juncker plan to mitigate the fallout from the financial crisis. “Public guarantees also proved effective at that time. The European Investment Bank offered a carrot to private investors by assuming a portion of the default risk,” points out the GDV. “That would be another good method of encouraging insurers to pursue green investments now. Initiatives could also be clustered into funds to make smaller, communal projects appealing to major investors. This saves costs and would support small insurers in particular, who don’t have sufficient resources to manage many individual projects,” adds the association. “Remember what von der Leyen said when announcing her Green Deal? No-one is to be left behind in the European transformation. That was a message to those regions and sectors most affected by the upheaval. It could also be interpreted as a nod to the insurance sector,” concludes the GDV on a positive note.

German insurers ready to back green recovery but incentives and rule changes needed first

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