Global warming is becoming more of a hot topic in the insurance industry. On the one hand this is due to the potential increase of both life and general insurance claims as a result of increases in adverse weather conditions (e.g. hurricanes, floods and fires), and on the other hand this is due to a need to understand the climate element inherent in the investment portfolios of insurance companies. In addition, any consequences of global warming may result in changes to the underwriting terms which insurers are willing to offer.
This month the G8 announced a commitment to reduce global greenhouse gas emissions to an annual average of 2 tonnes per person by 2050. It failed to agree more interim targets. That task is carried over to December 2009, when world leaders meet to negotiate new obligations to replace the CO2 reduction targets previously applicable under the Kyoto Protocol.
There have already been some important regulatory interventions in relation to climate change, including the EU's emissions trading scheme and the adoption by the UK and some others of binding midterm and longer range emission reduction targets and recent moves in the US. Overall though there has been a dearth of the detailed policies required to enable major shifts in
technology and to drive the $500 billion global annual investment that is estimated to be necessary.
That policy gap is set to change. In mid July the UK’s Department of Energy and Climate Change published a suite of policy documents which set out proposals to decarbonise energy and transport over the next 40 years and we attach a link to our note on these policy documents:
http://www.linklaters.com/pdfs/publications/environment/EnergyandClimateChange.pdf
The expectation or hope is that the money for the projects will come from the institutional market, so we can expect a wooing of insurance companies and other institutional funds in the coming years. Other countries are likely to follow once an international deal is wrapped up.
And in the UK, we can also expect a drive for improved planning to enable adaptation to a hotter climate. Professor Bob Watson, currently Chief Scientist at the DEFRA, and former chair of the UN’s IPCC, recommends aiming for a 2 degree increase but planning for 4 degrees.
The urgency and scale of global warming can come as something of a surprise. There has been a misconception that the 2 degree predicted rise in average global temperature is within the parameters of a "business as usual" scenario. In fact most scientists see it as the tipping point at which significant change starts to occur. It also seems to be the most benign of the likely
outcomes.
The insurance sector is alert already to the problems posed by climate changes now taking place. A two degree increase will pose additional challenge. Utility providers who are under a regulatory obligation to provide a secure supply are re-assessing the extent to which networks are climate proof and the utility can be made available. Some are building more flood defences and storage systems. Adaptation is likely to be a particular focus for the many new build projects that we will need. Insurance companies will have an important voice in relation to these issues, and their offering will evolve to reflect the new risks and the policy and corporate responses to them.
Also, as mentioned above, there is also a need to understand the climate element inherent in investment portfolios of insurer. According to the HSBC Climate Change Index, the size of the global climate technology and services market by revenue at the end of 2007 was broadly equivalent to the GDP of Greece, and the overall trajectory was for rapid growth. Knowing the extent of one’s existing investment in companies active in these areas, and in respect of other more traditional industries, understanding their carbon position, in terms of assets and liabilities, is likely to become an increasingly time consuming obligation of any investment manager.
If you or others within your organisation would like to talk to us about climate change, please contact:
Vanessa Havard-Williams (Vanessa.Havard-Williams@linklaters.com, (44 20) 7456 4280).
