Governments and businesses are taking action on the likely impact of climate change, but the insurance industry is slow to face the consequences. Iain Watt and David Hampton report
Over the past 12 months, climate change has moved centre stage for politicians, individuals and businesses in many countries around the world. Recent scientific work and publications – notably the Fourth IPCC Report launched in Paris on 2 February – have addressed most of the issues raised by sceptics, and concluded that it is "very likely" that human activity is the main driver of climate change.
In the UK at least, there has also been a visible shift in attitudes and a marked increase in business activities to address climate change, although more needs to be done. Much has changed in the US as well. There is an increasing acknowledgement, even in the Bush Administration, that climate change is an issue.
In the past few months, the case for action has become overwhelming. The latest conclusions from the scientific community in the above report brought together the increasingly compelling evidence of the drivers of climate change as a result of seven years of additional observations, data and research.
Moreover, a number of specific disagreements that sceptics had with the science (such as the disparity between ground-based and satellite measurements of temperature) have been addressed and resolved over the past year.
From an economic perspective, the Stern report published in October last year made the case (under certain assumptions) that the cost of trying to avoid climate change would be much less than the cost of the likely consequences of climate change.
This report too, brought together existing data within a rigorous framework to achieve maximum impact.
In any event, it is now inevitable and agreed that some climate change will take place. As Sir David King, the UK government's chief
science adviser, commented recently: "The case for action is established beyond any
reasonable doubt for all but the most ardent or ill-informed sceptic."
The key issue is whether sufficient action will be taken imminently to change fundamentally the potential impact of climate change in the longer term. Again, the issue now is, what action to take.
In the UK, there have been some fundamental shifts in attitudes to the issue of climate change since the beginning of last year. For example, regulators and other policymakers are now behaving as if the scientific debate is over and taking steps in a variety of areas to address the issue in specific, but fragmented, ways. Also localised initiatives such as new aviation taxes have been introduced to penalise the most polluting cars.
Public perception and behaviour is changing. For the first time it is possible to see that consumer and business behaviours are driving major change, rather than new regulations.
A wide range of businesses are also responding, albeit for a variety of reasons. As a result, senior management in many companies are now engaged in serious debate as to what
climate change means for their businesses in a way that would have been unthinkable in most companies 12 months ago.
Climate change was also centre stage at the World Economic Forum meeting in Davos in January, where it was one of the three critical global issues that were identified.
Such developments should help to accelerate concrete actions and increase the pressure on both regulators and laggard companies to take meaningful action. Moreover, the focus is now increasing on the new business opportunities presented by climate change.
The picture in the US is much more complex than just the federal government's stated position, and significant uncertainty remains. But it is clear that much has changed and is likely to continue changing as negotiations for the post-Kyoto framework evolve. We should not forget that the presidential elections in 2008 will inevitably hasten a flurry of climate change related activity.
Hurricane Katrina was a seminal event in shifting some key attitudes in the US. While it is not possible to attribute any one storm to the effects of global warming, the scale of the damage served as a profound wake-up call as to the potential effects of significant climate change.
There are still many US politicians, companies and individuals who are sceptical about the issue and about the need for mandatory targets in particular, but the tide appears to be turning.
Much of the shift in commitment has taken place at state level where more than a quarter of states have made announcements about introducing "cap and trade" schemes, establishing commissions to assess how best to regulate carbon and, in the case of California, a far reaching set of targets and regulations that will be among the most demanding in the world.
Businesses in the US has also responded, with an increasing number of companies either taking direct steps to reduce emissions or calling for the US Government to adopt clear rules.
Even the current US administration has recognised that climate change is an important issue, though it still does not support mandatory emissions targets. Energy secretary Sam Bodman said that he accepted the conclusions of the IPCC report and President Bush himself referred to "the serious challenge of global climate change" in his State of the Union address.
In the Senate, the elections last year have also shifted the balance. Senators McCain (a Republican presidential candidate) and Lieberman have joined forces with Barack Obama (a Democrat presidential candidate) to submit a revised version of earlier proposals to introduce mandatory emissions caps.
While it may be tempting to consider the presidential elections in 2008 as a key tipping point, it seems increasingly likely that there will be some form of federal carbon regulation in the US before even the current Kyoto agreement expires, irrespective of who wins the elections.
Currently, Prime Minister Tony Blair reportedly believes that there is a chance for a global agreement to follow Kyoto. Many may not share his optimism because, first, there is still uncertainty as to whether the US and China will actually sign-up to a global agreement and, if so, what form it will take.
Second, there is no guarantee that the actual terms of the agreement will provide sufficient pressure or incentives to reduce carbon emissions quickly or far enough.
Third, the experience with the Kyoto agreement makes it clear, however, that a global agreement does not result in consistent global action and the devil will be in the detail of particular local regulations and specific cap and trade schemes.
The time has come to stop star-gazing and to act, both to mitigate risk and to seize opportunity.
It has long been recognised by the insurance industry that they will be among the first businesses to be directly affected by climate change, as a result of direct changes in weather and in particular the intensity and frequency of extreme weather events.
More recently, a number of UK and European companies have announced various initiatives to address climate change and reduce emissions.
The US insurance industry has at the same time recognised these risks and has been taking some active steps to address the issue.
But there are other new or increased risks that the US industry as a whole has done less about. These include the potential impacts on health as evidenced by the spread of the west nile virus in the US and, elsewhere, the heatwave related deaths in Europe during 2003.
There are also concerns, especially in places such as Florida, over the availability and affordability of insurance for weather-related events.
Then there is directors' liability insurance, which typically excludes pollution-related cover and puts significant onus on directors to disclose possible environmental liabilities.
And there is scope for new opportunities such as insurance for renewable energy projects and carbon offset projects.
The power of the insurance industry's investment portfolios in influencing company behaviours, despite the activities of the Carbon Disclosure Project and the Investor Network on Climate Risk that has filed a range of proxy motions calling for companies to adopt climate change strategies.
For example, a recent report by Ceres, the national environmental network, and the Carbon Disclosure Project on disclosure of climate change risks rated the insurance industry as one of the worst performers.
Less than 50% of Standard & Poor's 500 insurance companies responded at all to the questionnaire and, on average, those that did respond provided less than a quarter of the requested information. Only AIG was singled out as being a good example of disclosure and governance.
Overall, there is still much to be done in the US insurance industry for it to address fully the implications of climate change. It is likely that there will be exciting product innovations and initiatives as more companies get to grips with the issue, but in the meantime, many companies in the US could learn a lot from industry leaders in other countries.
For the insurance industry elsewhere in the world, recent developments in the US make it more likely that global efforts will be made to reduce the impact of climate change. While this is clearly a positive development, the need is still for all companies to increase their own efforts to address the issue, irrespective of what happens in the US.
With $3.4 trillion in yearly premium income topped by another $1 trillion in investment income, insurance is the largest industry in the world. While climate change and public policy uncertainty pose risks, this industry has been presented with a real opportunity to apply its immense expertise to square up to the climate change issue and to lead the world through it.
A few companies in the industry are already recognised as leaders on the issue. More have taken some steps to put their own house in order and many around the world have done little or nothing.
The urgent need is for all companies to start taking consequent actions to protect and to enhance their own position and that of the industry and to help the world address the fundamental challenges around climate change. That includes helping the world to have a better understanding of the risks and implications associated with climate change
The need for action is now. And widely recognised in many of the leading economies and even the US. Whether or not the US will sign up to a post-Kyoto global accord remains to be seen, but the likelihood is high that there will be meaningful regulations around greenhouse gas emissions in the US. While any efforts to reduce the effects of climate change should be welcomed (especially by insurance companies), for most companies the challenge now is what action to take.
The issues for business are complex and can impact on its commercial, competitive and financial performance in the short, medium and longer-term. The complexity and uncertainty can be overwhelming, but there are a number of practical steps that companies can take to provide clarity and more that can be done to help secure business performance by addressing the issues of climate change and emissions reduction. IT
Iain Watt is an associate of Cairneagle Associates, a strategy consultancy with a climate change practice, and David Hampton is a partner at Cairneagle.
Insurance Times is hosting a climate change conference on 12-13 March that will focus on what businesses is doing and can do to respond to the commercial implications of climate change