UN Environment’s Finance Initiative (UNEP FI) has announced a partnership with 16 of the world’s largest insurers – representing around 10% of world premium and USD 5 trillion in assets under management – to develop a new generation of risk assessment tools designed to enable the insurance industry to better understand the impacts of climate change on their business. This understanding is vital for an industry whose core business is to manage risk.
The pilot group will develop analytical tools that they will use to pioneer insurance industry climate risk disclosures that are in line with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). This will require them to make use of the latest climate science, including some of the most advanced, forward-looking climate scenarios available.
“For generations, the insurance industry has served as society’s early warning system and risk manager by understanding, reducing, pricing and carrying risk. Its message now is loud and clear: climate change risk is intensifying and is a serious threat to the insurability of communities and economies around the world,” said UN Environment Chief, Erik Solheim. “An uninsurable world is a price that society could not afford. This is why UN Environment is working with leading insurers to understand and reduce risk, to seize unprecedented business opportunities in climate action, and to ensure an insurable, resilient and sustainable world.”
The recent report of the Intergovernmental Panel on Climate Change (IPCC) highlights the rapid, far-reaching and unprecedented changes needed to limit global warming to 1.5°C. As rising temperatures accelerate sea level rise and catalyse extreme weather events, communities, businesses, cities and countries are facing new types and higher levels of risk.
The Financial Stability Board, chaired by Bank of England Governor Mark Carney, mandated its Task Force to develop voluntary and consistent climate-related financial disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. The Task Force’s final recommendations were submitted to the G20 in June 2017 and have four key pillars—governance, strategy, risk management, and metrics and targets.
The tools and indicators that will be jointly developed and piloted by the Insurer Group will incorporate the latest scenario analysis to assess climate-related physical and transition risks in insurance portfolios. Insurance coverage incentivises risk reduction, puts a price tag on risk, de-risks investments, and serves as a financial shock absorber for communities, businesses and governments. While insurers are also major investors—with global assets under management of over USD 30 trillion—this initiative will focus on the assessment of climate risks in their core insurance portfolios and products.
“The more insurers understand climate risks facing the economy, the more they can make prudent decisions in managing risk and serving their clients, and the more efficient and stable our markets will become,” said Michael Bloomberg, Chair of the Task Force and UN Special Envoy for Climate Action. “The pioneering work of this group will pave the way for greater climate risk transparency and climate action by the global insurance industry, and it’s great to see that it’s consistent with our Task Force’s recommendations.”
Reliable information on insurers’ exposure to climate risks will strengthen the stability of the financial system, encourage more and better disclosures from client companies across sectors, and help boost insurance products and investments needed to transition to low-carbon, climate-resilient communities and economies.
The Insurer Group’s work follows equivalent work by leading banks and investors, all convened by UNEP FI for the purpose of advancing financial sector know-how on climate change and the adoption of the Task Force’s recommendations. Its outputs aim to support key platforms and initiatives, including the UN Secretary-General’s Climate Summit in New York in September next year to drive ambitious climate action needed to achieve the goals of the Paris Agreement on Climate Change.
Source: This article is based on UN Environment’s press release.