Climate change is not just an environmental concern. Financial institutions play a role, too
Financial institutions, including those in the insurance industry, have had to develop and adapt their products and services over the years to suit the ever-changing lifestyles of humans. In the current reality of COVID-19, this included a heightened awareness of life risks and how insurers could keep their clients’ finances resilient during this time. Yet, amid the global health and economic crisis of COVID-19, another important global crisis still threatens the world.
That crisis is climate change.
Many important initiatives around this ongoing threat to the earth and humanity have had to take a backseat as governments, financial institutions and businesses across the world scrambled to address the more pressing concern of the novel coronavirus. However, already two months into 2021, we can no longer afford to delay climate action.
According to the World Economic Forum (WEF) Global Risks Report, climate change is one of the top five risks facing the world. Not coincidentally, climate change also impacts the other four risks of economic stability and social cohesion, pressures on health systems, digital fragmentation, and an unsettled geopolitical landscape. The COVID-19 pandemic has shown us that action must be prioritised in order to speed up mitigation and adaptation efforts and, as with a pandemic, climate change will require effort and emergency to ensure a sustainable future and long-term resilience.
Insurers, who have a far more sophisticated understanding, managing and carrying risk than many other industry sectors, are in a unique position to advise and engage the government and public on risk management and resilience efforts. Why? For one, insurance requires a strategic approach to current and hypothetical circumstances or events – pandemics and natural disasters being two of these. Additionally, climate change poses a major risk to the global economy and, because the insurance industry actively insures the economy against unpredictable events and has a history of helping society understand and adapt to emerging risks, they are best placed to play a leading role in addressing the impacts of climate change.
The insurance industry, which has been utilising tools to assess and underwrite risks has the opportunity to evaluate the potential of climate change related risks. The industry could further use the catastrophe models to evaluate future potential weather-related losses. The industry is regularly exposed to claims when a natural disaster takes place and must ensure that it adopts Task Force on Climate-Related Financial Disclosures (TCFD) recommendations by raising the profile of climate risks. Secondly, describe and disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy and financial planning. Thirdly, work with all stakeholders to manage climate risk exposure including the management of assets, scrutiny and adaptation of existing business policies. Finally, set targets and metrics to assess and manage climate related risks and opportunities.
Regulatory bodies have already started asking questions regarding insurers’ action plans that relate to the changing environment. Which is why large insurance companies such as Santam have not only incorporated holistic policies into their core offerings, such as third-party liability contracts like professional indemnity (PI) or office’s insurance, and are ensuring their business clients adequately manage transition risks, but have aligned with the TCFD designed by the Financial Stability Board. Santam has also committed to working with stakeholders to engage in research and development to identify risk and resilience measures, explore innovative and sustainable finance and insurance solutions, and embrace the environmental, social and corporate governance (ESG) factors to help better determine the future financial returns and risks of their clients and the economy as a whole.
By working to align with all of the TCFD recommendations, financial institutions can develop consistent climate-related financial risk disclosures, strengthen the stability of the financial sector and contribute to a better understanding of climate risks and its impacts on the economy. Organisations’ climate-related disclosures, including Santam’s, can be accessed via the CDP (formerly the Climate Disclosure Project) website, which helps financial institutions and other bodies remain committed to good climate change action and support the transition to a low-carbon economy by addressing and disclosing their greenhouse gas (GHG) emissions.
If the financial sector is to lead climate change, it is imperative they start within their own operations. Thereafter, encouraging and supporting clients, partners and investment portfolios will only be a natural transition – one that will prove positive for the economy, and the world.