The insurance and investment industry has woken up to the implications of climate change over the past few years, recognising the huge impact it could have on the world financial market. This article looks at the pressing issues, the reaction of the EU and what is being done.
EU Lisbon Strategy
A fundamental aspect of the EU’s Lisbon Strategy is that environmental issues and concern for the sustainability of development are at the heart of economic progress in the European Union. For further examination of EU policy see our LinksDossiers on Sustainable Development: EU Strategy and EU policies on climate change.
The Commission’s corporate social responsibility programme is also pushing businesses towards contributing to sustainable development.
Investors are realising that they will have to take climate change risk into account in deciding how to invest. The level of risk associated with certain investments, according to geographic region or type of industry, will alter as the effects of climate change are felt. Secondly, whether or not companies are taking steps to reduce emissions, to promote clean technologies etc, will have an impact on the level of investment they attract. Also, investors may see new opportunities in companies and technologies which, because of their awareness of climate change issues, are more likely to ride the storm in the long run.
The insurance industry has already had to deal with claims related to changes in climate – floods in the UK, heat waves in France and fires in Italy. In the UK, house holders in flood-prone areas have found they are bearing the brunt, with insurance premiums skyrocketing. In Germany, the NGO Germanwatch has launched an initiative for an insurance-based climate compensation scheme – an insurance policy specifically geared towards catastrophes caused by changes in the climate.
An issue which is clearly linked to investment is pensions. If there is a change in the nature of investment, as the nature of risk changes, traditional pension funds may themselves be in danger. Add to this the ageing population and the reduction in the labour market making pension contributions, and you have the potential for breakdown in world systems for providing income after retirement. With the increasing capitalisation of the banking system, and the shifting of risk that entails, it is the individual workers, the contributors to insurance and pension funds, who are the true owners of capital. Many commentators are now pointing out that investment must be geared to safeguarding the long-term interests of these true owners.
The past few years has seen a growing number of bodies and forums formed to discuss this issue. Some of the leading international bodies are:
: international organisation aimed at enhancing individual and corporate accountability and sustainable development.
: group of US investment funds, environmental organisations and public interest groups campaigning for sustainable investment.
: Institutional Investors Group on Climate Change: London-based group focussed on climate change risks and opportunities for the European financial market.
: United Nations Environmental Programme Financial initiative: global partnership between UNEP and the financial sector (banks, insurers and fund managers) working to understand the impact of environmental change on financial performance.
Investor Network on Climate Risk
: forum for discussion on climate risk.
: Sustainable Energy Finance Initiative: promotes increased investment in energy efficiency and renewable energy.
: UN-funded NGO building partnerships between finance and industry to promote sustainable energy.