3 ways to make climate central to business

Climate change is one of the biggest global challenges that will shape the way we do business now and in the coming decades. I was one of 79 CEOs to sign the open letter that stresses the need to actively manage climate risks and incorporate them in decision making —  not least to realize growth opportunities. Here is how we, an insurer and investor, will make climate part of our core business:

1 Anticipate: Make climate considerations a mainstream part of business

Companies are well advised to incorporate climate change considerations into their business. Let’s take carbon risk as an example. The Carbon Tracker Initiative highlighted in 2011, that companies whose business models are based on exploiting proven reserves of fossil fuels would face substantial asset write-downs once climate policy gets more stringent. If policymakers now in Paris agree on serious action to limit global warming to 2°C, their current business models would become unsustainable. That’s no marginal “green issue”. For investors carbon risk is as material as credit risks or liquidity risks and needs to be included in mainstream portfolio analysis. Long-term investors, such as insurance companies, play a leading role here. For example, the signatories of the Portfolio Decarbonization Coalition, have already committed to measuring their carbon footprint, scaling back their financing of carbon-intensive businesses and investing in renewables and low-carbon infrastructure.

2 Care: Protect the climate vulnerable

Managing risks is our profession. We advise our customers on how they can reduce risks and minimize damages, and we compensate those who have suffered losses. With a view to climate change impacts, this means both incentivizing preventive measures and compensating customers, for example, if their harvest was lost because of drought or the supply chain interrupted by floods.

In June 2015, the G7 leaders have committed to extending insurance services to 400 million people in developing countries who are most vulnerable to the impacts of climate change. Together with the Munich Climate Insurance Initiative (MCII), Allianz and other insurers are developing ideas and tools to tackle this ambitious goal by 2020. Public-private collaboration will be key. For example, in many cases only local governments can provide the data needed for designing products such as flood insurance.

Insurers can also foster adaptation and risk reduction, by making insurance cover conditional on the client taking certain measure to mitigate risks – which in turn helps to keep premiums at acceptable levels. It is clear that no stakeholder alone can succeed in solving the challenges of climate change: Insurance can and should be a complementary mechanism in a wider framework of adaptation and disaster risk reduction.

3 Enable: Provide solutions for the low-carbon society

Now is the time to shift! Around USD 90 trillion will have to be invested globally in the next 15 years to maintain and upgrade infrastructure in energy, cities and agriculture, according to the Global Commission on the Economy and Climate. Those investments will be in assets that we will use for the next 30 or 40 years, or even longer. We must invest green today to make sure our planet does not overheat in decades to come. Or, as President Obama said at the COP, otherwise we would “have to devote more and more and more of our economic resources not to growing opportunity for our people but to adapting to the various consequences of the changing climate.” But where will the money come from? Governments are slashing their investment budgets in attempt to bring public debt burdens under control. Banks are discouraged from investing long-term, since they rely on short-term funding from deposits and money markets. Insurers are different. They collect capital from policy holders and usually hold it for a long time, which makes them natural long-term investors. Climate-related investments such as renewable energies normally last at least 20 years and are an attractive growth market. They can help insurers to diversify their investment portfolios and provide sound and stable long-term. Allianz, for example, aims to at least double its investments in renewables in the medium-term from currently EUR 2.5 billion. To encourage the massive scale of investment needed, we urge governments to provide regulatory stability for low-carbon investments.

As professional risk managers, we have to take climate change seriously. Not on our own, but jointly with all our clients.

Author: Oliver Bäte, Chairman of the Board of Management, Allianz SE. The author is one of 79 signatories to an open letter from CEOs to world leaders urging climate action. 

Image: Two “wind trees”, a renewable energy innovation, are pictured at the sunset during the World Climate Change Conference 2015 (COP21) at Le Bourget, near Paris, France, December 6, 2015. REUTERS/Stephane Mahe