In a world of climate and conflict chaos, it’s time for insurers to choose a sustainable path.
This story originally ran in Illuminem.
Who would not agree with Ukrainian scientist Svitlana Krakovska: “Let me assure you that this human-induced climate change and war against Ukraine have direct connections and the same roots. They are fossil fuels and humanity’s dependence on them”. That insurers, like the rest of the financial world, end up being facilitators of this process ought to not surprise anyone. As we navigate ourselves into the dire straits of climate change, we seem to be enacting a theater of the absurd.
Not everything people insure is benign. Insuring, and re-insuring, anything has its unintended consequences for the climate. With the growing realization of the environmental and societal implications of insurance, insurers should distance themselves from anything that adversely affects overall sustainability. Globally, enlightened insurers are moving towards a principle of sustainable insurance, thereby attempting to create a more risk aware and resilient society dealing with climate change proactively.
Insurers are known for their expertise in pricing and quantifying risk – underwriting. Unfortunately, in the process, they not only end up insuring what contributes to the global carbon footprint but also investing their surplus funds into such businesses. In this way, they ‘inadvertently’ end up aiding and abetting climate change. Two camps are already emerging: Players in the U.S. who allegedly continue to support the fossil fuel industry, and the Europeans, who are increasingly distancing themselves from it. The line of divide, however, is not very clear and it remains a messy affair.
American insurers remain largely wedded to oil & gas. Europe is a mixed bag with large insurers such as Lloyd’s still insuring fossil fuel projects. U.S. President Joe Biden and his team are keen to transform the insurance industry. However, American banks and asset managers unfortunately fund the biggest fossil fuel money pipeline. Much of the European regulatory system is steadily aligning to the Paris Agreement and pushing for a green new deal. Asia is an overall laggard, given its heavy fossil fuel energy dependence.
Ironically, insurers insure what harms its customers while investing in the harmful businesses.
A new report by Reclaim Finance discovered that 30 of the largest asset managers have $550 billion holdings in oil, gas and coal companies, all of which have fossil fuel expansion plans. That is $550 billion invested in companies that are, quite literally, destroying the planet. The “divestment versus engagement” debate is a big distraction. Asset managers are not engaging companies on key climate issues when it comes to limiting global warming to 1.5°C. It’s also striking that they are actually sending the opposite signal because they are still buying new debt from fossil fuel developers. As the report states, “Asset managers that provide fresh cash to companies that are ignoring climate science are purely and simply pouring more fuel in the fire.”
Ironically, insurers insure what harms its customers while investing in the harmful businesses. Some oxymoron! This is triggering what the UNFCCC calls the Triple Planetary Crisis: Climate change, pollution and biodiversity loss.
Threats to biodiversity
Nearly 1 million species face extinction in the coming years, thanks to warming temperatures, deforestation, development, overfishing and other human activities. What do those disappearances mean for us?
As Collin O’Mara at the National Wildlife Federation says, biodiversity is a little like an airplane. If you start taking out screws one at a time, you don’t know which one is going to make the wing or the engine fall off, but eventually the system is going to collapse.
Butterflies, bees, birds and even some small mammals help pollinate more than 1,200 crops impacting one of every three bites of food we eat. More than half of all plants depend on wildlife to disperse their seeds.
As our climate warms, millions of species are shifting poleward in a dramatic reorganization of life on earth.
As our climate warms, millions of species are shifting poleward in a dramatic reorganization of life on earth. However, our understanding of these dynamics has largely ignored a key feature of life — animals and other organisms must eat. Researchers have filled this knowledge gap by examining how the basic need for nourishment affects species’ movements.
Associate Professor Malin Pinsky of the Department of Ecology, Evolution, and Natural Resources at Rutgers, says that these changing dynamics will not be in only one place but will have an impact globally and that does not bode well for marine life.
Food systems at risk
While the world endured global supply chain issues and delays for over two years of the Covid-19 pandemic, markets suffered, economies buckled and there were real fears that it would mean potential shortages of essentials, including food, across the globe.
Such a fate is finally arriving with the Russian invasion of Ukraine impacting the planting, production and harvesting of wheat and other vital commodities in the region. Known as the “breadbasket of Europe”, the regions impacted not only feed a few tens of millions there, but at least hundreds of millions elsewhere in the world.
The war in Ukraine has reportedly had a dramatic impact on the planting of wheat, spelling disaster for the summer of 2022 and beyond. When approximately 30% of the world’s total wheat supply, and 15% of the world’s total calories consumed, is cut off from export and the seriousness of the situation begins to properly set in within the coming months, the number of those stuck in food insecurity and potential starvation is predicted to enter the billions.
If no action is taken to curtail the climate crisis, crop losses will be devastating.
The result is set to be almost apocalyptic. At the time of writing, data by the UN’s World Food Programme show that around 890 million people worldwide lack sufficient food consumption and subsist on an inadequate amount of calories needed. That number is constantly on the rise, and is a few hundred million higher than statistics from 2020.
As the billionaire astrophysicist and entrepreneur, David Friedberg, said in a widely-circulated recent video, the entirety of the planet’s food supply operates on only a 90-day cycle that constantly replenishes. With people consuming produce made and exported from that previous cycle, any delay or obstruction to the current or next cycle greatly impacts the amount of food and commodities supplied to populations.
Crops are already seeing losses from heat and drought. Can genetic diversity — a return to foods’ origins — help combat the climate challenges ahead?
The industrialization of agriculture in the last century boosted production around the world but that success also made our food systems much more vulnerable to the growing climate crisis, Friedberg said. Modern agriculture depends on high-yield monocrops from a narrow genetic base that needs lots of fertilizers, chemicals and irrigation.
All our food systems — agriculture, forestry, fisheries and aquaculture – are buckling under the stress of rising temperatures, wildfires, droughts and floods. Even in the best-case scenario, global heating is expected to make the earth less suitable for the crops that provide most of our calories, Friedberg said. If no action is taken to curtail the climate crisis, crop losses will be devastating. No form of insurance protection will help preempt this. Insurers and the rest of the financial services ought to promptly withdraw from the causes of these impacts.
Internationally, conflicts over fossil fuel energy are on the rise. The growing cost, scarcity and difficulties of transporting this energy, as well as the environmental impacts of extracting and using it, make it highly volatile. By contrast, locally-generated renewable energy provides flexibility, local jobs and energy security. Friedberg says that plans he has developed for 145 countries shows that they all have enough renewable energy resources to power their own energy for all purposes if they make the transition.
Clean, renewable energy does not run out. Fossil fuels do.
Theater of the absurd
Unfortunately, clean energy and battery storage mean more mining. Cobalt, lithium, copper, rare earths are often found in remote, underdeveloped areas where governance is spotty and conflict is endemic. Interestingly, colonialism and imperialism too have been fuelled by the pursuit of resources including fossil fuel and rare minerals. As the pendulum of history swung back, the formerly colonized have found a place beside the colonizers. The U.K.’s Home Secretary Priti Patel is the key architect of a proposed plan to send back refugees, including climate refugees, back to the countries they come from while wanting more access to these countries for their resources. This is the height of climate tragedy.
While wealthy nations like the U.S. are largely responsible for climate change, the impacts are being felt most acutely in countries that have contributed the least to global greenhouse gas emissions.
At this point, no one can doubt the urgency of acting on climate change, as the most recent IPCC analyses show that the world is far off course from a trajectory to 1.5°C – passing that point would greatly increase the likelihood of extreme heat and floods, while damaging coastlines and coral reefs. While wealthy nations like the U.S. are largely responsible for climate change, the impacts are being felt most acutely in countries that have contributed the least to global greenhouse gas emissions.
This injustice follows a litany of historical and ongoing wrongs including centuries of colonial plunder and enslavement that enriched Europe and then the U.S., at the expense of the Global South. More recently, the austerity measures of the 1980s and ’90s in response to the Third World Debt Crisis stifled development and locked many countries into decades of debt dependency. The results of this, along with the pandemic’s economic impacts, are likely to be a new debt crisis for 58 of the 65 of lowest-income countries experiencing moderate risk of debt distress to full-blown default.
Actuaries as risk professionals matter
The IPCC Working Group addresses the most up-to-date physical understanding of the climate system and climate change. As “Climate Science: A Summary for Actuaries” describes: “It brings together the latest advances in climate science, combining multiple lines of evidence from paleoclimate, observations, process understanding and global and regional climate simulations to get the clearest picture of past, present and possible future climate.”
Actuaries, as risk professionals, need to understand the physical impacts of climate systems and climate changes.
Actuaries, as risk professionals, need to understand the physical impacts of climate systems and climate changes. Such impacts will affect how risks are underwritten, priced, managed and reported, whether for general life or health insurance, pensions, other financial institutions, or social security. “It is important for actuaries to understand the magnitude of the potential changes, the uncertainty of their frequency and intensity, and the inherent volatility of such risks,” the report states.
“Each of the physical changes analyzed in the latest IPCC Working Group I report could have an impact on human well-being and the long-term sustainability of the environment. Within these changes, actuaries are particularly interested in the effect of climate change on floods, droughts, fires, storms, rise of sea level, air pollution and the long-term effects of climate change.”
Climate losses are now touching $120 billion per year
The Ukraine invasion has suddenly driven the U.S. to drill more oil and gas thereby, furiously gnawing into what’s left of the global carbon budget. The resulting greenhouse gasses are bound to precipitate nasty climate outcomes, thereby affecting the insured, uninsured and uninsurable. Climate losses are now touching $120 billion per year and expected to grow if greenhouse gas emissions continue unabated. The burden of economic losses increasingly falls on the U.S. federal government as an insurer of last resort for impacted communities unable to insure their assets. Not accounting for this would be a recipe for a bigger disaster.
Meanwhile…celebrate the successes
With all eyes on Ukraine, we tend to gloss over protracted conflict zones from less developed countries. Here is something inspiring and compelling enough to take us out of the current influx of bad news. In 2018, Burundi launched a vast national reforestation program to boost the country’s dwindling forest cover and reduce conflict after its recent civil war. Today, the formerly warring factions are working together on the reforestation project that is planting a variety of tree species. Shouldn’t this be a reason to celebrate a smart and successful climate solution rather than the absurdity, however momentary?