2019 was the year that climate risk became embedded in the UK public conscience. Powered by the connecting forces of social media, strong, clear, messages from the younger members of society and powerful images of natural catastrophes from around the globe, climate has become the defining issue of our age. It’s presenting all of us with a core challenge: “How do we effectively manage a speedy transition to a low carbon economy and how do we take everybody with us on this journey?” Power generation sits at the very centre of this new global challenge, while the insurance industry has a pivotal role in supporting the power industry in its own global transition.
COP 26 The political and policy backdrop is worthy of detailed comment. 2020 will see the annual Conference of Parties to the UN Convention on Climate Change (called “COP26” because it is the 26th such COP) being hosted by the UK for the first time ever, in Glasgow from November 9-201.
Arguably this will be the biggest COP since the Paris Agreement (PA) was signed in 2015. The PA saw countries committing to emission reduction pledges (known as “Nationally Determined Contributions” or “NDCs”). Because these NDCs were nothing like enough to put the world on track for 2 degrees (let alone 1.5 degrees, which has increasingly been the focus since the Integrated Pollution Prevention and Control (IPPC)2 to report last year), the PA established a five yearly review cycle where countries are expected to seek to raise ambition. Glasgow will see the first of these reviews.
Unrealistic targets Existing NDCs see 2030 emissions remain very broadly at the level of today’s emissions. This is much better than where they would have been under “Business as Usual” but is nothing like enough. To be on track for 1.5 degrees by 2030, countries would need to halve their collective emissions from today’s levels; and for 2 degrees, to reduce them by something like a quarter. Unfortunately, it is already clear that countries will not raise their ambitions by anything like this, especially given the very challenging geopolitical situation. The UK position The UK Government has not set out their detailed strategy as yet, but they are likely to look to move away from an exclusive focus on raising NDCs to a broader based approach and have hinted at a three-part strategy.
First, achieving as much progress as possible on NDCs for 2030, whilst knowing we won’t come close to closing the gap. China matters above all here, as it is easily the world’s biggest emitter. The EU is likely to raise its ambition this year; the big question will be whether it can persuade others, above all China, to do the same at a difficult political moment for China. A key moment will be an extraordinary EU-China Summit convened by Chancellor Merkel in Leipzig in September 2020 where climate will be one of the issues on the agenda.
Second, complementing countries’ 2030 targets, with commitments to net zero in the longer term (mid-century and later) from key countries and other actors. The EU is likely to agree early this year to set a net zero date of 2050. China is working on a strategy; a date within 10 or 20 years of 2050 would be a big win.
Third, sectoral announcements, often with non-state actors like business and cities, playing a key role:
But the COP will not be easy. A particular challenge will be very high public expectations, especially in Europe. The aspirations of youth and other groups are likely to be unfulfilled. The UK Government will need to achieve an outcome which can credibly be presented as sufficient to be called “progress”; maybe by keeping 1.5/2 degrees within reach by later action and by continued technological progress in the real economy. But there will nonetheless be widespread anger; green strategists are likely to direct this anger at companies and sectors perceived not to be pulling their weight.
Awkward timing The timing of the US election is also awkward, falling on November 3 2020, less than a week before the COP starts. A victory for Mr Trump will make it harder to articulate a compelling narrative that global action in the coming years will continue to ramp up. A Democrat victory may make that story easier but could see the debate about raising major economy ambition pushed back a year to allow the new Administration more time.
Furthermore, the relations between the UK Government in London and the Scottish Assembly in Edinburgh may not always be smooth, while the UK’s own delivery will be under a very bright spotlight from policies to meet the 4th and 5th Carbon Budgets, to export credits for oil and gas, to the issue of Heathrow airport.
The effect of ESG The investment community is also substantial changing its position in terms of what qualifies as “investable” assets. The common reference point is an investments ESG (Environmental, Social, Governance) rating and capital owners are placing increasingly significant percentages of their portfolios under full ESG mandates; green finance is just becoming regular finance.
New products So how does the global insurance industry respond to this rapidly evolving environment? There is an opportunity to contribute positively to the adaption of our key infrastructure and mitigation of climate risk whilst using our well-established skills to some commercial advantage. Insurance has a fundamental role of underpinning and de risking investments and with a 60 plus trillion-dollar number being quoted as the price to build the necessary low carbon infrastructure around the globe, the opportunities to build new insurance products and make new markets will be very significant.
Helping our clients We can help our clients stay in business as they begin their transition journey. We can lend our insights, data, analytics and pricing models to the broader financial community, to speed up the vital work of building new global investment frameworks and metrics. We can bring our well-established, innovative broking and underwriting skills to support new technologies. Perhaps above all, we can step out of our own (re)insurance universe and become a leading force for collaboration to solve these new risk challenges.
Peter Betts CBE is a climate change consultant and Strategic Advisor to Willis Towers Watson in the UK.
1 https://sdg.iisd.org/events/2020-un-climate-change-conference-unfccc-cop-26/ 2 All statistics quoted in this article are from the source as per footnote above