Industry heats up debate on climate change

by Maryvonne Gray 28 Oct 2015

Industry heats up debate on climate change

Insurance industry players joined forces with banking representatives to explain to climate change experts at a recent conference why their sectors are crucial forces in the climate change debate.

The CEO of the Insurance Council of New Zealand (ICNZ), Tim Grafton, was chairing a panel discussion featuring Munich Re regional manager NZ Martin Kreft; IAG NZ senior manager government and stakeholder relations Bryce Davies; plus banking and investment representatives Justine Sefton and Emma Herd at last week’s Australia-New Zealand Climate Change & Business Conference.

Grafton told Insurance Business the insurance and finance sectors were ‘the pivotal drivers of change’ from a high carbon to low carbon economy globally but more discussion was needed on just how critical that would be.

He said: “Climate change presents one of the biggest risks to humankind and the insurance industry has long been an active analyst of a likely consequence of climate change.”

Grafton said there were three key areas of risk where insurance played a role which the Bank of England had recently identified:
  • Risks to the physical assets the industry underwrites;
·         Risks to income streams in the transition from a high carbon to low carbon economy, especially if that were a sudden or sharp process as it will affect investment streams coming from fossil fuel-dependent industries;
·         Liability risks, ie underwriting organisations who may fail to make decisions that could prevent damage to property because they knew of the likely consequences of climate change but did nothing about it.

Grafton said companies, governments or other organisations could adopt insurance industry disciplines and turn risk into an annualised cost on their balance sheet. By taking steps to become a more resilient company, for example having a lower dependence on carbon industries, that could reduce those costs on the balance sheet.

With banks also limiting their investment in fossil fuels industries to certain levels of emissions, both sectors could begin to turn the levers to transit to a lower carbon economy.

“I think it was a little bit of an eyeopener for the audience around risk. In my introductory remarks I painted a picture around food security referring to a Lloyd’s report from June this year.”

Grafton outlined the knock-on effects of an extreme El Nino where a combination of droughts and torrential rain in the US, India, Australia, Indonesia and the Philippines has dramatic effects on crop yield and subsequently the prices of the four staples of wheat, maize, soy and rice.

The result of that, he said, could be seen as the precursor to the Arab Spring and the Syrian civil war, where food riots combined with political instability and in the future could see countries taking measures to protect their food supplies and prompt a lot of business interruption.

“So you can see the risks that attach and the insurance industry is thinking about that where others don’t because you flow through the cascading events that can result from an El Nino extreme event.”

While it appeared a bleak picture, Grafton said he believed the trends were going in the right direction and the debate was strengthening around climate change after the distraction of the GFC.

“The question is how quickly change will happen and for any global investment and insurance some level of predictability of change is important.

“A clear message that came out of our session and the conference generally is there is a need to have a more collaborative approach in terms of central and local government and business in addressing climate change and I think also importantly much better public communication about climate change.

“There are still people who think climate change will make where they live warmer so they’ll be able to grow more crops without absolutely failing to realise that we may not be able to sell our goods overseas if countries are impoverished and can’t be buying our product.”

He added: “It’s a global issue and some of that thinking has to change. I think conferences like this highlight how progress is being made – there is no debate about the science, it’s more about how do we make this transition work and how do we work more closely to achieve it.”

Grafton said the declaration made last week by Local Government New Zealand to unite and push for more urgent and ambitious action to address climate change effects was ‘really encouraging.’

“They are thinking seriously about how councils need to adapt into the future and that whole conversation is how do we manage that risk better so that’s all to the good and we’re keen to be part of that conversation with them.”