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22 October, 2018 00:00 00 AM

Insurance companies – an unlikely ally in the fight against climate change?

Olivier Oullier
Insurance companies – an unlikely ally in the fight against climate change?

A few of weeks ago, the Intergovernmental Panel on Climate Change (IPCC) released a special report urging governments and industries to work together to keep global warming below 1.5C. According to the organisation, a critical point has been reached. If no effective action is taken in the next few years, the damage to the planet will be irreversible.

In spite of the wealth of evidence accumulated and shared since 1988 by the IPCC and many other expert groups, why do many people still not seem to care about the dramatic consequences of climate change? That is a question that heads of state, political, philanthropic and academic leaders are still scratching their heads over.

One of the first explanations is that, despite what many of us might think, being informed about an issue rarely leads to people adopting the right behaviour. If this were the case, no physician or health professional would ever smoke. As much as we like to portray ourselves as rational creatures, this is not how human brains function.

Second, for a long time, the negative consequences of climate change remained quite abstract for many of us because they were not perceived as immediate. There was therefore very little incentive to make change happen.

At the same time, as some of the biggest investors in the world, insurance companies also face significant losses as climate change hits the companies they invest in. “Climate change poses risks for insurance companies, so do responses to it by markets, businesses, consumers and governments,” says Dave Jones, California’s Insurance Commissioner, in a new report by the Asset Owners Disclosure Project (AODP), which sees itself as the world’s benchmark of climate leadership in the investment system.

“The impacts of climate-related risks are a growing reality for the insurance sector. This reality has key implications for that sector's valuation,” the report adds. “Weather-related financial losses, regulatory and technological changes, liability risks, and health impacts related to climate change have implications for the business operations, underwriting, and financial reserving of insurance companies.”

Insurers know this – one of their key functions is to price risk so they know how much to charge in premiums to insure their customers. As a result, they devote significant resources to assessing various risks, and they have a better idea than most of the financial impacts of climate change.

And yet the sector is not aligning itself with the emissions reduction targets set out by the Paris Agreement, to limit average temperature rises to “well below 2°C”, according to AODP’s report, Got it Covered? Insurance in a Changing Climate.

However, things have changed over the past decade – and not for the better. Extreme weather, rising sea levels, melting glaciers, an increase in respiratory diseases and a growing number of climate refugees − these are some of the many reminders that climate change is no longer a future possibility. It is now a solid fact of the present that has resulted in dramatic and visible consequences. This is why the majority of the world’s leaders now believe that fighting climate change and creating a sustainable future are top priorities.

The problem is that there is a clear gap between what leaders want and the way the overwhelming majority of people live. For much of the world’s population, protecting the environment is an unaffordable luxury.

In developed nations, most people answer “yes” when asked if they care about the environment. For fear of ridicule or social stigma, very few people would dare to say “no”. Psychologists call this bias “social desirability”.

Despite this pressure to say the right thing, the truth is that many people will not have given a great deal of consideration to matters of ecology, simply because they will have been too busy working, looking after their families and getting on with the often tricky business of everyday life.

Finally, because the immediate rewards – which the human brain always favours over deferred benefits− of eco-friendly behaviour are few, many people use the cost of changing established habits as an excuse not to put it into practice. From the dangers of cycling in major cities to the comparatively high price of electric cars, reasons to keep doing the same things in the same old ways are easy to find. It is also often said that taking individual steps towards a cleaner, more energy-efficient future are useless if the rest of the world is not acting accordingly.

So have we already lost the war against climate change?

Perhaps it’s not too late. The work of Professor Richard Thaler from the University of Chicago, the 2017 winner of the Nobel prize for economics has influenced numerous governmental and private organisations, allowing them to better understand how humans beings make decisions, and how to help them adopt behaviors that are beneficial to individuals and society at large.

Last week William Nordhaus from Yale University was one of the winners of the 2018 prize for “integrating climate change into long-run macroeconomic analysis”. Mr Nordhaus is a strong advocate of a global carbon tax as an efficient way to address climate change.

One thing is for sure, a systemic approach that brings individual behaviour and macro-economic policy together is our only hope of meaningful change. Here, the insurance sector could play a vital role. The report examines 80 of the world’s largest insurers, with $15 trillion Assets Under Management, on their management of material climate risk.

“Less than 0.5per cent of assets invested by the world’s 80 largest insurers are in low-carbon investments that provide solutions to climate change, despite the insurance sector being highly exposed to its financial risks,” the report says, and nine out of ten investment strategies in the sector make the Paris Agreement goals currently unattainable.

In addition, progress is very uneven across different regions. “A handful of insurance firms in Europe are showing true leadership on climate change and are actively managing the financial risks it poses in capital markets,” the report says.

The four top performers in AODP’s ranking – AXA, Aviva, Allianz and Legal & General – are all European, while all but three US insurance firms surveyed have no plans in place to decarbonise their portfolios or address climate-related financial risks .

The writer is a British neuroscientist



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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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