Tackling climate change will require ‘transforming the whole economy’, financiers warn

Extensive flooding caused by Hurricane Harvey in a residential area in Southeast Texas, USA, 31 August, 2017. [EPA-EFE/Staff Sgt. Daniel Martinez]

This article is part of our special report Decoupling economic growth from greenhouse gas emissions.

The global economy has to prepare for a profound transformation in the coming decades as the impact of climate change becomes more tangible, Zurich insurance experts told EURACTIV.com.

“Tackling climate change is about transforming the whole economy,” said Zurich Insurance Group’s Chief Risk Officer Alison Martin.

“We have to change the way we live, the way we move, how we spend our money. This is a profound transformation and the majority of changes are yet to come,” she said.

Johanna Köb, the head of Responsible Investment at Zurich Insurance Group, pointed out that consumers are becoming increasingly aware of climate change issues.

“They demand that businesses act more responsibly, act on climate change, and this public opinion turning is a fundamentally important concept because that means the impact of climate change can and will translate into political acts,” she stressed, highlighting the case of the Hambach Forest in Germany, where citizen action prevented RWE from razing a forest to build a coal mine.

Global transition still short

But while extreme weather is on the rise worldwide, global climate action still falls short of hitting the Paris Agreement target of limiting global warming to “well below 2°C”.

“Our analysis shows that the likelihood of missing the Paris Agreement goals is higher than achieving it,” Alison Martin said. “Yet, the IPCC made it clear that we only have 12 years to act, that is a handful of years,” she warned, pointing out that 2017 was the most expensive year ever in terms of damages, with an estimated $300 billion global costs.

Both Martin and Köb stressed that climate change is one of the most complex risks facing society today, as it is inter-generational, international and interdependent.

“Whilst many solutions for the highly interconnected risks from climate change will need to be sought at a multi-stakeholder level, there are specific actions businesses can take and tools they can use,” Martin said.

CDP boss: ‘Companies or sectors may face liability risks on climate change’

Private investors need to come clean and commit to science-based targets on climate change, says Paul Simpson. Unfortunately, “there is still money out there for the dirty investments in the short term,” he laments, calling on regulators to take action against opaque finance.

To the question of what specific risks businesses are confronted with, Zurich’s Chief Risk Officer identifies two: the physical risks, linked to extreme weather events, and the transition risks, which are largely technology and policy-driven, she explained.

At the most basic level, physical risks management involves helping customers to prepare for the worst. That protection can include, for example, measures such as flood barriers or using building materials that are easier to replace if damaged.

Transitions risks imply being able to look ahead in the future, Alison Martin explained. 

“That means knowing about the company’s strategy in regard to the ongoing transition. For example, what about unexpected change, such as a change of legislation that could prove very impactful for energy producers,” she said.

Therefore, companies have to adapt to the consequences of climate change and define a strategic risk analysis on the type and scale of impact climate change will have in the mid to long term, she said.

“It is crucial for businesses to develop a climate resilience adaptation strategy and act on it,” Martin stressed.

Financial leverage

Because of the increasing impact climate change has on their business case, insurance companies are also taking action against global warming via their investment policies.

They are for example increasing their investments in green energy schemes such as wind parks, solar farms and hydro projects. Allianz had €5.6 billion invested in renewable energy at the end of 2017, while late last year Axa increased its target for green investments from €3 billion to 12 billion by 2020.

Europe takes first step toward clarifying booming 'green' finance

The European Commission unveiled on Thursday (8 March) its highly expected action plan on sustainable finance, aiming to clarify what can be labelled as “green” investment and potentially lowering capital requirements on asset holders.

In 2017, as the first in private sector, Zurich announced its target to build an impact investment portfolio of $5 billion that complemented the exposure with impact targets: to help avoid five million tons of CO2 equivalent emissions and to improve five million people’s lives on an annual basis.

A growing number have also pulled back from insuring thermal coal companies or divested from the coal sector.

“As a responsible investor, we use capital markets to search for and fund solutions to fight climate change, but also to answer social and environmental issues,” Johanna Köb explained.

She said Zurich Insurance’s investment strategy relies on three pillars: Environmental, Social and Governance (ESG) integration, Impact investing and collaborating with industry.

“For us, this is an economic approach and climate change is a red thread that runs through the three categories,” she explained.

“We are using a holistic view of financial, environmental, social and governance risks an investment entails to finally ask the question what should the truly risk-adjusted return be,” she specified.   

European oil majors better prepared for energy transition than US, Chinese counterparts

Oil majors are “lagging” when it comes to preparing for the low-carbon energy transition, according to a new report from financial watchdog CDP, which nonetheless praised BP, Eni, Equinor, Total, Repsol and Shell for taking the industry’s lead.

Impact investing and green bonds

Köb put the focus on two specific financial tools Zurich is using: impact investing and green bonds.

Impact investment focuses on measuring the effect of the investment against a pre-determined goal – rather than simple sustainable investments.

Green bonds are financial instruments where the proceeds are invested exclusively in green projects that generate climate or other environmental benefits, for example in renewable energy, energy efficiency, sustainable waste management, or sustainable land use. 

According to the Climate Bond Initiative, the green bond market has seen strong growth, with the market really starting to take off in 2014 when $37 billion was issued. In 2017 issuance reached $162.5 billion, setting yet another record.

Köb explained that Zurich aims to more than double its impact investments’ scheme up to $5 billion, which would avoid five million tons of CO2 emissions per year and improve the lives and livelihoods of five million people.

The move follows on from the Swiss insurance company’s announcement back in 2012 of a $2 billion commitment mainly through green bonds, which it has now completed.

“Zurich has 1.4% of its asset invested in green bonds, financing renewable energy and energy efficiency projects,” Köb pointed out.

Zurich has approximately $200 billion of assets under management globally.

“We currently hold over 150 green bonds in our portfolio, from 90 issuers in nine currencies, supporting green projects ranging from renewable energy generation to sustainable real estate or water management improvements,” she explained.

Köb added that investments in social and sustainability bonds, which provide financing to projects and activities aimed at social issues beyond climate change, have also grown to over $400 million.

“Overall, our impact investment portfolio grew from $1.7 billion in 2016 to 3.2 billion in 2018, including not only green, but also social and sustainability bonds, as well as commitments to four private equity funds,” she said.

Expert group recommends setting up European standards for ‘green bonds’

An EU sustainability taxonomy, a definition of priority investment areas, the clarification of investor duties and development of “official” European sustainability standards for green bonds are some of the recommendations experts made to the European Commission on Wednesday (31 January).

Subscribe to our newsletters