On an increasingly fragile planet, oceans play a central role in regulating the climate. As the world’s second largest group of institutional investors, how can insurance companies help minimise environmental damage to our seas and the significant knock-on effects?
Oceans under pressure
Climate change continues to raise the earth’s temperature and the oceans are suffering deeply. With their waters warming and expanding, sea levels could rise by more than a meter over the next century.
Large pieces of the Arctic have already disappeared and climate change could ultimately redraw the world map. A more immediate effect of the warming oceans is the higher instance of intense storms that wreak havoc on lives and push up insurance claims.
But on top of global warming, another environmental disaster is happening to our oceans in the shape of plastic pollution. There are now around 50tn-75tn items of plastic in the sea, weighing in at a colossal 363bn pounds.
As well as choking the life out of the marine ecosystem, plastic pollution weakens the ability of oceans to absorb harmful CO2 and limit the greenhouse gas’s significant contribution to global warming.
Something’s got to give and it’s up to influential industries like insurance to drive change.
Insurers on a mission
With nearly $40.3tn (£30.8tn) in assets, insurance companies have a massive responsibility to divert more of their investments into ethical and sustainable assets and effect change in the companies they invest in.
But insurers can also exert their influence by deciding who they insure. More than 140 businesses have signed up to the Principles of Sustainable Insurance initiative and all are committed to helping address key environmental, social and governance risks.
As both investors and policy providers, insurers can help tackle the environmental problems that face our oceans in the following ways.
1. Reduce transition risk
As the world transitions to a low carbon and more sustainable economy, investing in companies that produce or rely heavily on single-use plastics creates a very real transition risk for insurers.
As consumers become more aware of the dangers and some countries ban these ocean pollutants entirely, it’s never been more urgent to clean up your portfolio and stop investing in single-use plastic producers. Plastic pollution should also be factored into insurers’ own ESG frameworks alongside reducing holdings in carbon-intensive industries.
Underwriting portfolios contain transition risks, too. By choosing not to insure industries heavily reliant on fossil fuels or those involved in producing single-use plastic today, businesses can mitigate the effects of tighter environmental controls on tomorrow’s income.
2. Address the physical risks of pollution
Tackling both plastic pollution and fossil fuel exposure throughout your organisation will give you a frontline role in fighting climate change and reducing its catastrophic impacts.
In 2021, natural catastrophes caused an estimated $105bn insured losses globally. With ocean levels rising, coastal flooding will only increase, while plastic pollution threatens the health of humans, pets and marine life, damages marine vessels and biodiversity, and has a harmful economic impact on the fishing industry and many other business incomes.
Everything that insurers do to limit plastic pollution and climate change will likely help reduce the frequency and severity of future claims. Their efforts can also show the industry as the force for good that it was always set up to be – supporting policyholders and beneficiaries through their times of need.
3. Achieve and drive regulatory change
Along with increased litigation against polluters, or those who fly-tip in the ocean, both regulators and insurers will likely become more sophisticated in the disclosure, quantification and management of climate risks. Inherent risks that are off the balance sheet today will quickly come to the surface, making it critical to go beyond merely ticking the box of compliance.
Government policy, however, is likely to be the single biggest driver of change. By getting behind the commitments that world leaders made at COP26, insurers can play a more proactive part in tackling ESG issues.
Challenges and opportunities
The environmental challenges ahead are huge, but they also give the insurance industry opportunities to raise its profile and lead by example.
The results of making changes will also cascade through all the corporations that insurers interact with, for a second wave of positive impacts on the sea, the land and the environment as a whole.
Martin Sarjeant is senior vice-president of product management, insurance at FIS
