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Jan 2023

COP27: Inaction and consequences

Source: Asia Insurance Review | Jan 2023

Julia KuikAllianz Asia Pacific’s Ms Julia Kuik shares her takeaways from the 2022 UN climate change conference in Sharm El Sheikh and the future of sustainability across the globe.
 
 
November’s COP27 climate change conference in Egypt has concluded without breaking any considerable ground, causing insurers and financial firms to factor in a higher chance of climate-related disruption to come. Allianz is calibrating its business to the impending demands of more severe weather patterns and other effects of climate change, especially in Asia – home to the majority of the world’s population and the continent likely to be most heavily impacted.
 
The lead up to the high-profile conference of 92 world leaders and 35,000 representatives elicited a generally cautious expectation of significant movement on climate change, but in the event few positive changes were forthcoming. Despite some agreements being established in a few areas, the conference is widely viewed as another missed opportunity by commentators, businesses and ordinary citizens who care about the planet.
 
Now the world has to reckon with the foreseeable consequences of a lack of substantial progress on climate change. For the insurance sector, there are major challenges implicit in the increased certainty of rising temperatures and the ongoing use of fossil fuels, but also opportunities from a few wins at COP27, such as loss-and-damage funds, public-private partnerships (PPPs), and increased transparency.
 
Degrees of difference
The COP27 participants did not establish a firm commitment to limit global heating to 1.5°C and are still merely ‘pursuing efforts’ to reach that target. Countries have also largely failed to adjust their nationally-determined contributions to the level needed to cap our temperature rise within 1.5°C.
 
Governments’ inability to reach agreement has made the current target of halving emissions between 2020 and 2030 less feasible, which in turn makes it harder for insurers to achieve their ESG portfolio targets. On the plus side, demand could spur research into new technologies – with global warming now likely to exceed 1.5°C sooner than anticipated, the second half of the 21st century will see a growing need for ways to remove carbon from the atmosphere. Insurers will have to be ready to safeguard extensive new R&D projects, infrastructure, and investments that could help save the planet. Nowhere is currently more focused on both of these aspects than Asia, where ESG targets and initiatives are being rapidly adopted and enormous recourses are pouring into tech research.
 
Comprising 60% of the world’s population and relying 80% on fossil fuels, Asia is the theatre for the world to achieve a net-zero future. Allianz has made ESG the foundation of our strategy, recognising the unavoidable centrality of climate change to the mission of insuring and safeguarding people’s lives and livelihoods. Our 2030 strategy for Asia embeds environmental, social, and governance considerations in every aspect of our business and enshrines sustainability as a preeminent driver of growth.
 
Last hurrah for fossil fuels?
An effort by India and Europe to move the world away from fossil fuel consumption was blocked at COP27 by the major fuel extractors, principally Russia and Saudi Arabia. The general sense among energy market observers is that conflicts in Ukraine, Syria, Yemen and parts of Africa have helped to give fossil fuels (and fuel-producing economies) a reprieve by strangling supplies and boosting demand.
 
Public scrutiny of the oil and gas industries can only intensify as prices spiral and climate change begins to bite, leading elements of the value chain to take a principled stance against fossil fuels. For example, from January 2023 Allianz will no longer be issuing new property and casualty insurance to fund new oil and gas projects and from July it will stop renewing existing contracts.
 
Restoring the balance
The Egypt conference did see some forward movement in terms of redressing the imbalanced impact of climate change on emerging economies.
 
Loss and damage (L&D) became the biggest talking point of COP27 and its highest-profile outcome, with first-world nations now committing to compensate poorer countries for the physical effects of climate change. This is an important signal of intent and will involve climate finance, payments to protect carbon sinks (e.g., tropical forests), and just energy transition partnerships – where developing market economies receive PPP finance from the global north to replace old energy solutions (such as coal power plants) with renewable energies.
 
While most details are yet to be decided, the agreement on L&D opens up significant new areas for the insurance industry to consider, as L&D funds could involve insurance contracts and payments across a wide array of contexts. L&D funds might be designed to finance PPP schemes, thus potentially driving blended finance business opportunities in developed and emerging markets in the years ahead, and they will help push countries to increase their efforts in terms of resilience and adaptability.
 
A parallel talking point of COP27 was the ‘just transition’ (JT) movement to ensure that workers and communities affected by climate change and the measures taken to alleviate it are protected and fairly compensated. While most of the financial sector’s approach to JT remains nascent, Allianz finds itself well positioned in the drive towards blended finance instruments and has often been cited as a prime example of enabling positive transitions in emerging markets.
 
Becoming more accountable
Transparency has been a demand at COP27, with several frameworks being put forward to assess the credibility of net-zero targets and accompany transition plans, including the UN High-Level Expert Group on Net-Zero Commitments. Insurance companies can play a major role here, with Allianz and net-zero alliance actors in the industry being well positioned to raise standards of accountability. Insurers in Asia can play a role in introducing ESG benchmarks, standards and processes to businesses unfamiliar with the latest international requirements.
 
However, frameworks and approaches need to be continuously reviewed to reflect the latest steps forward and the global convergence of goals and standards.
 
The wider outlook
Another of the headline insurance-related initiatives to come out of COP27 was the so-called ‘Global Shield’ mechanism, a pool of $200m set aside by G7 economies to provide swift financial aid when vulnerable nations are hit by climate change, but critics charge that the amount is inadequate to meet the scale of devastation expected over the coming years. The insurance industry and other enterprises will therefore need to play an increasingly major role in planning for and mitigating the effects of climate change on businesses and communities.
 
In the shorter term, 2023 will see continued risk from geopolitical challenges and the lingering effects of COVID, especially in Asia – which is also likely to feel the impacts of climate change as the year progresses. The dangerous temperatures seen across India this summer could well be repeated, as could the ongoing drought in parts of China, not to mention storms and other extreme weather events. Insurers will need to stay adaptable to handle the multiplicity of risk that will face us in the year ahead. A 
 
Ms Julia Kuik is the chief corporate development officer and sustainability sponsor for Allianz Asia Pacific.
 

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