Climate risks linked to burning coal should make insurers think again before backing industry, says Jeremy Oppenheim
(Pic: E&Y)
By Ed King
The world’s top insurance companies have it in their power to deal a hammer blow to the most polluting form of energy production in a stroke – if they refused to provide cover for the coal industry.
That is the view of Jeremy Oppenheim, a director at consultants McKinsey and head of the New Climate Economy project, who said this would also protect insurers against future risks posed by climate change.
“It is paradoxical to sell products that enable a set if activities that will cause immense costs,” he told a meeting of the Association of British Insurers on Tuesday.
“Would it be possible to say we will simply not insure these assets in 20 years?”
Oppenheim suggested this could be a move taken by the world’s top reinsurance companies, such as Swiss RE and Munich RE, which could face higher liabilities if extreme weather events intensify as a result of climate change.
Burning coal generates 41% of global electricity, is the leading source of climate warming gases and is blamed for toxic smogs in India and China.
Governments have committed to limiting temperature rises above 2C, beyond which scientists say the world faces more floods, droughts and an acceleration in the rate of sea level rise due to melting ice caps.
According to a new study by Swiss RE, in 2014 recorded natural disasters were the highest on record, with global economic losses rated at US $110 billion.
Full disclosure
Speaking on the sidelines of the ABI event, UK energy and climate chief Ed Davey refused to be drawn on Oppenheim’s idea.
But he told RTCC he was in favour of new reporting requirements that would allow investors to see what coal assets companies had on their balance sheets.
“Investors can decide – that firm has a lot of its revenue streams from coal in the 2030s – I don’t believe that will be possible so I’ll pull out of that,” he said.
“It sounds small but if you start doing the numbers… a small reallocation of capital out of fossil fuels to clean technology – we are talking trillions. It’s game changing,” he added.
Coal companies are already facing pressure from a global fossil fuel divestment campaign and from the oil and gas industry, which sees coal as a useful climate change scapegoat.
In the US at least 26 coal companies have gone bust in the past 3 years, due to falling demand, while global growth in the fuel is slowing, say analysts.
Real threat
No representatives from British insurers RTCC spoke to at the ABI event were willing to say they would stop covering the coal industry now or in the future.
One said it would be immoral to refuse cover for miners who can face intense dangers above and below ground. Another said that where one insurer stopped, another would step in.
But there was widespread agreement that the insurance industry needs to rapidly wake up to the impending threat posed by climate change.
Manuel Lewin, head of responsible investment at Zurich said the way in which climate change could impact investments was poorly understood.
“It is a known unknown. We know there is a risk but we don’t know how it will manifest itself over different sectors and a particular timeframe,” he said.
“People don’t know what liability levels they would face in a 3C world.”
Maurice Tulloch, CEO of Aviva, told delegates their business model would be “wiped out” if the planet warmed by 4C, which is the estimated impact of business as usual.
“This is a long term issue but it is coming down the tracks unless we act,” he said. “As investors and insurers we can have transformational potential.”
The industry had a “critical role” to play before and during a planned UN climate summit in Paris later this year he said, where countries are expected to reach a pact to limit carbon pollution.
“Our job as investors is to help change… doing nothing is not an option,” he added.
Stranded assets
Trevor Maynard, head of the exposure management and reinsurance team at Lloyd’s of London, said insurers could help translate climate risks into a concept the general public would grasp.
“4C [of warming] sounds like a warm and pleasant planet – but we would not want that… it would be hellish,” he said.
The industry, which in the UK alone manages investments of £1.8 trillion, should “consider” risks associated with stranded assets, he added.
This concept, also known as a carbon bubble, holds that investing in oil, gas and coal reserves that cannot be burnt if the world agrees a climate deal at the UN is wasted money.
Future lawsuits against fossil fuel companies over pollution or their contribution to climate change were also a risk insurers needed to weigh up, said Louise Pryor, an associate at Callund Consulting.