As world leaders meet in Glasgow at COP26 to hopefully progress and accelerate the global fight against climate change, a new report from the University of Cambridge Institute for Sustainability Leadership (CISL) calls for the expansion of risk sharing systems at scale.
The report, ‘Risk Sharing in the Climate Emergency: Financial regulation for a resilient, net zero, just transition’, emphasises the fact that for risks to be managed they have to be shared.
Of course, the insurance and reinsurance industry has unique risk quantification and management skills, which have been leveraged across the globe to develop premium-based risk-sharing mechanisms designed to help some of the most vulnerable.
The report finds that it’s imperative that the approaches seen in the risk transfer sector are expanded across wider financial regulation, from microfinance to global financial institutions, in order to achieve a “climate-smart financial system.”
It’s a comprehensive report from the CISL, which proposes 20 steps to urgently govern, manage, and minimise climate risks for a just, resilient transition to net zero in both developed and developing countries.
Bronwyn Claire, Sr Programme Manager for ClimateWise, commented: “Traditionally expertise in risk sharing has sat with the insurance industry. Through our collaborative insights and desire to accelerate the transition to net zero, ClimateWise has seen how the expansion of these skills and understanding into a much wider group of economic and policy decision makers is vital in the race to tackle climate change.
“COP26 leaders gathered in Glasgow have the opportunity to recognise the importance of risk sharing to support the transition to a resilient, net zero economic and finance system. Robust disaster risk recovery and net zero aligned economy and society depends on the framework of the financial system reflecting the impact and future implications of climate risk.”
As the report highlights, modern risk-sharing systems include social protection, informal community networks and the insurance industry – and each of these has vital roles that can be applied to the climate crisis.
The report explains that, although combined these systems cover roughly 33% of global gross domestic product (GDP), their distribution is uneven and where they do exist, the response dedicated to climate risks is minimal.
In the foreword of the report, Mark Carney, UN Special Envoy on Climate Action and Finance, said: “In the face of the unfolding climate emergency, this report provides a timely and valuable overview of the lessons we can already draw from the global insurance system – across public, private and mutual sectors – and the opportunities for that system to help increase our systemic resilience to the worst effects of climate change.”
Adding that: “The global financial system is leading the way in the run up to COP26. This collaboration between senior regulators, policymakers and industry extends that leadership by informing a pathway beyond Glasgow that aims to secure a smoother and more equitable transition to a resilient, zero-carbon future.”
The new report was launched on COP26 Finance Day, and builds on the work and insights of its insurance leaders group ClimateWise and notes five main areas of action for policymakers, private and public entities, and the insurance sector.
Dominic Christian, Global Chairman of Reinsurance Solutions at broker Aon and Chair of ClimateWise, said: “As we each face the challenge of managing climate risk in our personal and professional roles, there is a great opportunity to step forward as leaders.
“We welcome and appreciate the calls to action set out in the report that give a clear direction and aspiration for insurance, finance, regulators and government. Stepping forward together gives us the best chance to deliver impact at a scale commensurate with the accelerating climate crisis.”
Specifically, the report calls on economic, policy, industry and advocacy actors to support the transition in the following ways:
- Policymakers – reinforce financial inclusion and sustainable development priorities within insurance regulators’ mandates to meet the climate objectives;
- Financial markets beyond insurance – accelerate consistent physical climate risk quantification through insurance experience, methods, metrics and resources;
- Public and private financial authorities – massively expand risk-sharing pools across financial systems to manage global-to-local and intergenerational climate risks;
- Insurance regulators and climate authorities – explore ways for UNFCCC and IAIS members to co-operate on shared climate risk objectives;
- Insurance sector – become pioneers of climate-related disclosures, prudential supervision and climate stewardship;
- Academia and NGOs – research the role of the insurance system in managing the social risks of the net zero transition.
In the report foreword, Youssef Nassef, Director, Adaptation Division, UNFCCC, commented: “At a time when rapid transformative action is essential to address the climate emergency, this inspiring report highlights the centrality of risk management in climate change mitigation and adaptation, and points to the unique contribution of the insurance industry and regulators to a better understanding of climate risks, and to building a resilient future.”
‘Risk Sharing in the Climate Emergency: Financial regulation for a resilient, net zero, just transition’ is co-authored by law firm Clyde & Co, and Geoff Summerhayes, Executive Board Member, APRA (2016-2020) and Chair Sustainable Insurance Forum (2018-2020).
Nigel Brook, Partner at Clyde & Co, said: “The transition to a net zero economy will require an unparalleled level of investment in new technology and infrastructure that will require complex financial and risk transfer solutions developed and delivered at unprecedented speed.
“Beyond the products they provide, insurers have the knowledge, expertise and skills to play an invaluable role in building resilience and addressing the risks associated with the climate emergency. In dealing with this issue, policymakers’ focus to date has mainly been on the banking and investment side of the financial services industry; they now need to broaden that focus to include insurance.”
