A Changing Climate

By the end of October, insurance executives worldwide were allowing themselves a collective sigh of relief as an unusually uneventful hurricane season was winding down in the Atlantic. And when another superstorm touched off by global warming blew through London and around the world on Oct. 30, they were[an error occurred while processing this directive] far more prepared than they would have been even a year ago.

The London storm was not literal, but political: Nicholas Stern, a respected former World Bank economist, released his long-awaited report on the long-term economic impact of climate change. Commissioned by Britain's Chancellor of the Exchequer Gordon Brown and embraced by Prime Minister Tony Blair, the Stern report rejected the conventional argument that combatting climate change is bad news for the global economy. On the contrary, Stern determined that inaction would bring far worse economic consequences. If developed nations do not begin to cut greenhouse-gas emissions soon, the economic cost of global warming could amount to 20% of world gdp.

A key part of the report calls on corporations around the world to cut back on their CO2 output. Now, as those companies try to address the bottom-line implications of carbon risk, they are looking for leadership from the insurance industry.

What's the relationship between the insurance business and global warming? Think of it as the canary in the corporate mine. Insurance companies' fortunes are directly tied to the accuracy of their environmental-risk projections. And as our climate continues to warm up and catastrophic weather events increase, those projections have needed thorough overhauls. Last year, for example, the industry's catastrophe models assumed that three Atlantic superstorms wouldn't occur in one year. But, in August, it wasn't just a run-of-the-mill third superstorm (if such a thing were possible) that proved the models wrong — it was Hurricane Katrina. The damage caused by Katrina was off the charts: 275,000 houses were destroyed, 10 times the number flattened by 1992's Hurricane Andrew, then the worst storm to hit the U.S.

The unexpected devastation wrought by Katrina (and the financial losses incurred by the insurance companies) plunged the industry into a reassessment of strategies and priorities that could aid the world's counterattack against global warming. The insurance business has long prided itself on taking a lead on social matters — as when, for example, the U.S. industry pushed for the establishment of official fire departments in the 19th century. More recently, British firms lobbied hard for better funding of flood defenses as part of its campaign to be able to keep offering flood insurance.

Earlier this year, Lloyds of London issued a report titled "Adapt or Bust," which served as an industry-wide clarion call. "The insurance industry must now seize the opportunity to make a difference," it stated, "not just to the future of our own industry, but to the future of society." On Oct. 31, Lloyds issued a follow-up that emphasized the need to encourage renewable energy technology, and appealed to companies to understand that adapting to climate change will need to become part of everyday business.

While Lloyds emphasized the urgency of change, many environmentalists look at insurers' green conversion with an air of skepticism. They point out that so far, only European companies seem to understand the problems climate change will present. And even then, publishing reports is only a small first step. To make a real difference, insurers need to change how they themselves do business. There remains, after all, a deep, structural contradiction between the risks insurance providers face from climate change and the places they invest to provide the income to meet those risks. Put more bluntly: most big insurers are heavily invested in those businesses that are believed to be the biggest contributors to global warming. A 2000 report by Friends of the Earth on the investment portfolios of the U.K.'s top insurance companies found they invested extensively in global oil and mining companies such as ExxonMobil, Elf Aquitaine and Rio Tinto. "There's a real disconnect between the investment side and the acknowledgment of climate change," says Matthew Arnold, who tracks the U.S. insurance industry as a director of consultants Sustainable Finance.

Insurers, however, insist that that's changing. With the growth of carbon-trading markets in Europe and the U.S., and the increasing likelihood that businesses' carbon footprints are likely to be taxed in the future, polluting companies and certain sectors are beginning to look like less attractive investments. For the past year, German giant Allianz has been assembling a team solely dedicated to renewable energy investments, headed by David Jones, Shell's former head of wind energy. The company estimates it will have €500 million invested in renewable-energy infrastructure projects over the next five years — notably in wind-turbine hardware. "We have identified renewable energy as an absolute growth market," says Thomas Pütter, chief executive of Allianz Capital Partners. Swiss Re, one of the first companies to pledge to make its own business carbon neutral (by cutting energy use and offsetting carbon emissions by purchasing credits or even planting trees) says that it is comparing its underwriting and investment portfolios, hoping to maximize profits from both sectors and minimize the company's overall risk.

Is there enough momentum to sustain this change in approach? Perhaps. Before last week, any climate-change action was likely to have been driven by a few innovative companies. Since the publication of the Stern report, however, the insurance industry along with the rest of the business community understand that the British government has gotten very serious about the issue, and they expect knock-on effects will expand to Europe. As for the hugely influential U.S. market, where the industry used to pass off environmental liability onto government, insurers now believe that climate change is so serious a threat to business that they can't wait for the public sector to take the initiative. "The industry is crucial to the functioning of the global economy," says Andrew Logan, energy and finance program director at the ethical investment organization CERES.

If the developed world is truly committed to reducing carbon emissions before the earth reaches what Stern describes as a catastrophic warming tipping point, then the insurance industry will need to play a bigger corporate and civic leadership role than it has ever done before. Here's hoping that more Hurricane Sterns will bring fewer Hurricane Katrinas.