For those whose business is calculating, managing and pricing risk, there is nothing more concerning today than climate change. In the 12th Annual Survey of Emerging Risks, published in March 2019 by the Society of Actuaries and other trade associations, risk managers placed global warming at the top of their list as a current and emerging risk.
The prominence of climate change as a driver of risk could have particularly important implications for new fossil fuel-fired power projects. As the effects of climate change grow more obvious each year, and the costs of those effects continue to ramp up, the likelihood of heavily-polluting energy producers being held accountable for their role in the crisis is increasingly a concern when it comes to project financing.
For insurers that may be forced to pay out in the case of third-party lawsuits, fossil fuels are becoming a dicey bet. They are also being strongly lobbied to ditch coverage for new fossil fuel projects by environmental groups such as Unfriend Coal, which was launched by a coalition of NGOs in 2017 to campaign for an end to insurers’ coverage of coal.
The campaign has made some impressive progress, with 19 major insurers now refusing or restricting coverage for new coal sector projects. The insurers with coal exit plans now represent 9.5% of the primary insurance market and 46.4% of the of the reinsurance market, the group noted in its latest coal insurance scorecard, published in December.
Here, Unfriend Coal campaign co-ordinator and Sunrise Project finance program director Peter Bosshard discusses the campaign to persuade insurers to ‘unfriend coal’, the remaining challenges and the future of green energy financing.
Chris Lo (CL): In the wider conversation around climate change, do you think the role of major financial service institutions like insurers has seen too little attention?
Peter Bosshard (PB): From the Paris Agreement and also from the IPCC [International Panel on Climate Change] it’s always been clear that all actors in society need to do their part to help avoid such a climate crisis. That includes the financial sector, and insurance companies in particular have a responsibility because they are very well aware of the risks that are facing society. Some of them have been warning about climate risks for more than 40 years, so it is just completely inconsistent with their own expertise, but also with their public brands, that they would still insure coal. Although since 2017 things have obviously changed a bit.
CL: In what ways would you argue that climate change is making coal-fired power projects an increasingly bad bet for the insurance sector?
PB: We’ve always been able to make a financial argument about why investors should no longer invest in coal and other fossil fuels – that’s the stranded assets argument. But insurers, their contracts go year-to-year, and so they’ve always said, ‘As long as we can still write contracts, we’ll be fine.’ So our first argument was one around the complete moral hypocrisy, to warn about climate risks while insuring and facilitating the biggest contributor to greenhouse gas emissions.
In the meantime, things have changed. There is now a growing wave of climate litigation, trying to hold the primary actors behind the climate crisis to account, make them pay up for the damages created by climate change – and that, of course, includes fossil fuel companies, which in turn typically have liability insurance covered by some major insurance company.
So far no fossil fuel company has been forced to pay for damages caused by climate change. But attribution science is improving and it’s becoming scientifically easier to attribute certain events and their damages to climate change. So it’s likely only a matter of time until the first climate lawsuits will be successful.
With this evolving context, insurers also have a clear financial self-interest to no longer insure coal. As a matter of fact, only last week we saw a new briefing paper from Moody’s Investors Service, which said insurers refraining from coal is a credit-positive, meaning it improves their creditworthiness. It’s another clear financial argument from the most respected source.
CL: Since 2017, which insurers have led the way in withdrawing insurance coverage from coal projects?
PB: I would say some of the early movers were AXA, Allianz, Swiss Re and Zurich.
CL: Are there sections of the insurance world where it’s more difficult to move the dial in terms of coal?
PB: There are certain clear laggards. Even with those that have acted – and so far it’s been 19 major insurers that have moved away from coal – there are some serious loopholes.
But there are some important remaining pockets of insurers still underwriting coal. We can list them quite quickly. In Europe that’s the Lloyd’s market – some of the speciality insurers using the Lloyd’s market have moved away from coal, like AXIS Capital, but most have not. They are a significant player and the only major player left in Europe – they need to move.
Then of course there are still major insurers in the United States that try to deny this reality that we need to move away from coal as quickly as possible. Most importantly, AIG.
Then the Asian insurers, starting with the Japanese but also Korean and Chinese insurers. Most of the new coal power plants in the pipeline are in Asia – South East Asia, East Asia, South Asia. Outside China, they are typically insured by international insurers, mostly from the West, but as they are now withdrawing from that market, the Japanese and Korean insurers will be under increasing pressure from their power companies that they should insure this business.
CL: Why do you think we see such a noticeable disparity between European insurers, which have been exiting coal quite rapidly, and insurers in the US and Asia? Are these places more invested in coal, as societies?
PB: I don’t think that’s the first reason – we’ve seen how quickly the UK moved away from coal, where of course coal is a very important part of the national heritage. We see that in Europe there has been more public pressure to act on climate change for many years.
In the US, that’s a more recent phenomenon but now growing very quickly, and we’ll see a huge mobilisation this spring, targeting the fossil fuel banks and insurers. We have seen a rapid string of announcements, from Goldman Sachs, JP Morgan Chase and others in recent months, and it is now also happening with US insurers, but with a bit of a time lag.
There has been less public pressure, and the US insurers insisted for a longer time on the mantra that their only responsibility is to increase shareholder value, to turn a profit. They still try to deflect any calls for them to also take on their social and environmental responsibilities, whereas in Europe that’s pretty much accepted.
CL: Unfriend Coal’s 2019 scorecard noted that Japanese insurers have argued that they can’t shift away from insuring coal because the government supports growing the sector. With countries like India and China still planning to build significant numbers of new coal plants in the coming years, will this kind of tension become more common?
PB: It is [becoming more common], particularly in Asia. But we’ve seen now that governments are shifting, or split [on the issue]. Like in Japan, the new Environment Minister [Shinjiro Koizumi], who is being touted as a future Prime Minister – he’s made it clear that Japan needs to move away from coal, and if the whole world moves away from coal, then Japan and Korea need to do the same.
Their companies have also become global players, including the insurance companies, like the biggest Japanese coal insurer, Tokio Marine, which has a major presence in the United States and is a gold sponsor of the Tokyo Olympics, which is a global event. They have a global brand nowadays, and they will have to accept their responsibility as a global actor, and I think it’s a matter of time until they will move as well.
CL: How confident are you about the ability of green finance and insurance to sufficiently incentivise the necessary wave of sustainable energy projects?
PB: I’m confident that we’re winning the war on coal, if you like. The question is, we’re running out of time, so will we win that struggle fast enough? That’s a big question mark. There is a lot of capital ready to move into the green economy, including green energy. There are still a lot of government hurdles, and there’s a lack of expertise in many sectors, including in the financial sectors, on how to appraise clean energy projects. That’s now rapidly changing, but that’s a reason why we’ve seen a slow start for many years.
Insurance companies, I would say, are also traditionally more conservative because they want to see lots of long-term data so they can adequately price risks. With the rapid disruption and transition we’re seeing, they are sometimes a bit slow off the block.
One challenge we’re still seeing is we don’t just need to move away from coal, we also need to move away from oil and gas over time. There’s some more time to move out of oil and gas, but we can’t afford to build any new oil and gas generation and production facilities, and there are still lots of them in the pipeline.
So that will be the next battlefront with the insurance industry and also with the rest of the financial industry. In order to be Paris-compliant, they also have to at least move away from covering new oil and gas expansion projects. There, we’ve hardly even started the work yet.