Insurers, reinsurers and risk managers are increasingly turning to data and tech-backed innovation to manage their exposures to climate change related extreme weather events. At the same time, allocators of capital like banks, asset managers, insurers and retirement funds are rethinking their investment approaches to deliver environmental and social impact. This newsletter reflects on an insurer versus asset manager approach to the looming crisis.
An ‘edge’ in flood exposure underwriting
An example of the former is the recent flood data partnership concluded between UK-based flood science specialist, JBA Risk Management, and South African non-life insurer Old Mutual Insure. It is an initiative that illustrates a small, tangible step by a local insurer to manage climate risk within the global risk paradigm. The deal gives the insurer access to detailed flood maps that will help it to gain underwriting insight into its flood exposures and open up wider access to affordable reinsurance capacity. Flood risk is a growing concern in South Africa, as evidenced by the devastation caused by flooding and mudslides along sections of the KwaZulu-Natal coastline in April 2022. Over 40 000 people were affected by the event. Old Mutual Insure will use the platform, which provides property-level flood risk data for any location, to better underwrite flood risks in both its commercial and personal lines business. “Flood risk is growing in South Africa with devastating impacts on both people and businesses,” said Ronald Richman, Chief Actuary at the insurer. He added that the partnership would enhance the insurer’s capability in underwriting flood exposure, allowing it to offer improved and more appropriate flood risk cover for clients, sustainably. Climate change is top-of-mind at asset managers too, forcing leading domestic and global brands to flock to global talk shops like the United Nations Climate Change conference (COPs) and World Economic Forum (WEF) Annual Meeting. Attendance of these ‘talk shops’ is mandatory for brands that wish to stay up-to-date on thinking around hot topics like climate change, decarbonisation, global warming, net-zero, the just energy transition and countless other climate-related concepts.
Climate activists (sic) jetting around the globe
Some 85 000 attendees participated in the COP28 climate activist pilgrimage to Dubai, the United Arab Emirates, from 30 November to 16 December 2023. These attendees were tasked with assessing the world’s progress towards the Paris Agreement, adopted by 196 parties during COP21. FAnews readers who want to understand why asset managers are so keen to mix it up with climate policymakers will find valuable insights in a Ninety One media release titled ‘COP28 takeaways: Transition investing has taken centre stage’. The asset manager noted that finance, when effectively directed and deployed, would play an indispensable role in driving the global energy transition. They observed that the COP events were increasingly focused on the role of the private sector and how to actively engage investors. “Strong policies designed to mitigate climate change need to be supported by a committed, active and engaged private sector for those policies to effect change at scale,” they wrote. Put another way, private sector finance is as important as public sector policy when it comes to tackling climate change. “Since COP26, we have committed to engage and be present in the policy and multi-party-level conversations that are happening around climate change,” said Annika Brouwer, Sustainability Specialist at Ninety One. The asset manager has shifted focus from traditional finance to engaging in country-level discussions and paying closer attention to how the private sector might influence climate change outcomes. This engagement aligns with the firm’s ‘sustainability with substance’ approach to business, on both the investment and operations fronts.
Balancing impact and return
“At COP26 in Glasgow, the term ‘transition’ was not used proactively; the principal conversation was around divestment [away from carbon intensive sectors],” said John Green, Chief Commercial Officer at the Ninety One, in a COP28-focused webinar. He observed that the most recent climate conference had more of a private sector leaning, encouraging funders and investors to think more actively about balancing impact and return. He also drew attention to a notable change in how the concept of transition was being interpreted. According to Green, it will take intent, investment and a process of discovery and innovation for the globe to successfully address climate change. He said that the world had finally realised that the battle for climate would be fought in the emerging market. “Developing and emerging economies are responsible for more than 60% of global carbon emissions [today], and will be responsible for over 90% of the growth in emissions over the next 20-years,” Green said. If policymakers fail to adapt, then China, India, and to a lesser extent, Africa could easily undo the net-zero progress being made in developed markets. In media commentary following the COP28 event, global consulting firm, PwC, identified Africa “as a central player in actioning efforts and initiatives for a better, more sustainable future”. They believe that Africa will lead the world towards a just transition provided equitable solutions are sought. In their opinion, Africa is more exposed to the negative consequences of global warming, and its leaders are thus morally obligated to join the fight. “Communities in Africa are often located in vulnerable regions such as coastal areas, arid and semi-arid lands and floodplains; climate change poses an existential threat,” said Lullu Krugel, PwC Africa Sustainability Leader.
Framework for a just transition
South Africa produces truckloads of greenhouse gases due to its coal-intensive electricity sector, and will have to lead its African peers in fighting climate change. “The global transition to net-zero is one of the most significant economic shifts facing the world as it has not been done before,” said Matimba Shimange, PwC Sustainability and Climate Change Associate. “South Africa has created a Framework for a Just Energy Transition [in recognition of] the difficulty of moving away from a carbon intensive economy; we are confident that this plan can be used as a blueprint for global adoption”. PwC acknowledged that the continent could not adopt an all-or-nothing approach: “African nations, as part of the G77–China bloc, are advocating for a more flexible approach to the phase-down or phase-out of fossil fuels. They emphasise the need for equity in this transition, arguing that developing nations, including many in Africa, should be given more time to shift to clean energy compared to wealthier, industrialised nations. They also seek increased financial and technological support from developed nations to build the necessary infrastructure for a transition to clean energy”. According to Brouwer, the topics debated at South Africa’s COP28 pavilion exposed the real-world difficulties in transitioning a coal-based economy to renewables. And the cost of the transition was up for discussion too, with many experts alarmed by the cost and complexity of, for example, building Carbon Capture, Usage and Storage (CCUS) plants on the continent. While Green welcomed the shift from concept to implementation, he warned that delivering on the Paris Agreement commitments would be tough: “The practicalities of [delivering on net-zero undertakings] is beginning to take hold”.
Cogs in the wheel of a just transition
Asset managers, banks, insurers and retirement funds are an integral part of the global just energy transition mechanism. “We are trying to shift institutional global capital into emerging markets for commercial return,” said Brouwer. “To invest at the scale needed to achieve net-zero and drive solutions in emerging market countries we have to prove the commerciality of projects”. Her words hinted at why decisionmakers from large financial institutions remain so intent on participating in the global climate narrative. “COP28 delivered many successes,” said Brouwer, before singling out fossil fuel phase out; methane capture; and social justice as challenges that will have to be addressed at future COPs. She concluded that COP28 had been a positive experience and that her firm would “continue engaging on mobilising capital for the emerging market transition”. Green closed in a similar vein: “My overriding takeout from my time at COP28 was that we are in a better position to understand the impact of the climate transition on the companies we invest in for our clients; we are committed to ‘sustainability with substance’ as our approach [which means that] understanding both the risks and the opportunities is critical”.
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