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11th December 2020
Joseph Wachira comforts Sudan, the planet’s last male northern white rhino, moments before he passed away at Ol Pejeta wildlife conservancy in northern Kenya. Photograph: Ami Vitale / 2020 wildlife photographer of the year competition.
Here at the Sustainable Finance Community team, we love a good book. In these colder months, there are few finer ways to relax than to settle into a comfy chair, book in hand, cup of tea at the ready and read away. If you love reading too, or would like to increase your sustainability knowledge, then join our book club. We’ll carefully select sustainability-themed books, both non-fiction and fiction, and offer structured discussions with your peers. All we ask is that you commit enough time to read the selected book and join a one-hour discussion group.
The first book is Doughnut Economics by Kate Raworth – an inspiring read that tackles the herculean challenge of meeting the needs of humanity whilst remaining within planetary boundaries. We aim to meet in late January to discuss.
UK Pushes Bond Investors to Take Up More Corporate Activism
A UK taskforce wants corporate bond investors to use the threat of divestment to push companies toward sustainable behaviour. Debt investors should integrate stewardship into their decision-making and consider selling the bonds of issuers that don’t live up to certain sustainability standards, according to a report from a taskforce led by the UK Treasury. Fund managers should also consider refusing to refinance or rollover securities as tools to engage with companies, it said.
Money managers are already facing growing pressure from investors to embed environmental, social and governance factors into their funds, particularly for equities. However, engaging with firms is still a relatively recent concept for many bondholders. The report recommends that the Investment Association works with money managers to develop guidance on improving stewardship in fixed income.
Climate change: can the insurance industry afford the rising flood risk?
The world still remains unprotected from severe flooding: in 2019 floods caused $82bn in damage but only 16% of that was insured according to Aon. Global warming and rising sea levels only mean that flooding is likely to become even more frequent and severe. Although the insurance industry has abundant capital waiting to be deployed for flood risk, the concentrated and correlated nature of flood risks means that private insurers are forced to charge high premiums. In response, the US and UK have developed (differing) state-backed insurance programmes to protect their citizens: the National Flood Insurance Program in the US and Flood Re in the UK.
However, experts agree that prevention is better than the cure and that the best way to protect homeowners is through improved flood risk management. Detailed public flood maps, making homes more resilient and excluding new buildings from state subsidies would align incentives and reduce the suffering caused by flooding.
Scientists warn of ‘disconnect’ between EU climate goals and finance rules
An open letter by 123 scientists from 27 countries has highlighted a concern that the European Commission’s draft rules on sustainable finance do not align sufficiently with the EU’s pledges to reach net zero emissions by 2050. Independent experts and climate scientists contributed research to the draft text for stipulating scientific thresholds for green economic activity, but later cited that important details in their recommendations were missing. As a result of these omissions, the scientists believe that the Commission’s taxonomy may not be compliant with international climate goals, such as those in the Paris Climate agreement, and those set out by the EU itself.
The sustainable finance taxonomy produced by the EU will define which investments are ‘green’ or ‘brown’, with additional obligatory disclosures for large EU-listed companies. However, disagreements have arisen, for example, environmental groups insist that nuclear and gas should not be considered ‘green’ investments, whilst EU member states with large nuclear and gas sectors do not wish to be penalised for low-carbon energy generation.
Public consultation on the draft taxonomy will end on December 18, with the text adopted in 2021 by MEPs and EU governments. The new rules will come into force from 2022 onwards.
Emissions cuts in line with Paris Agreement would see benefits ‘within two decades’
While most climate research often focuses on the impacts of global emissions cuts in the second half of this century and beyond, new analysis by climate scientists at the University of Leeds suggests there are also “substantial near-term benefits”. The authors note that the next 20 years is a key period for policymakers but the findings mean that “immediate and strong action on climate change can bring benefits within current lifetimes and not just far into the future”. The study also dispels the myth that “we needn’t bother about mitigation now and we can leave it for future generations.”
Predicting near-term benefits of climate change mitigation is difficult for two reasons: natural cycles in the atmosphere and oceans result in short-term volatility in the rates of global warming and CO2 levels will continue to rise even with a fall in emissions now (“it takes a while to notice the effect of putting the brakes on the Titanic”). This study attempts to solve this problem by using two models in a blended approach. The first model provides a robust understanding of long-term climate changes and a second simpler one runs thousands of simulations allowing a broader range of possible futures to be explored.
The Danish climate minister closing down the oil industry for good
Denmark’s climate minister, Dan Jørgensen, spoke with the Guardian about the country’s historic announcement on phasing out fossil fuel extraction by 2050. He hopes the decision to immediately end all new oil and gas exploration in the Danish North Sea will not only meet Denmark’s ambitious climate targets, but also empower other economies to follow suit. All future exploration will be banned through the Government’s ruling to no longer issue new exploration permits. Companies who currently hold licenses will however be allowed to continue, as it would not be financially possible to cease all oil and gas extraction immediately. Jørgensen sets out that the end date of 2050 gives clarity and stability to incumbent oil companies with licenses. Jørgensen highlights the significance of this decision when explaining that Denmark is the biggest oil producer in the EU, and much of its welfare state is funded by income from the oil industry.
Denmark’s climate goal to cut emissions by 70% by 2030 is currently the most ambitious in the world. This is equivalent to reducing emissions by 20 million tonnes of CO2 equivalent, of which 5 million tonnes have already been achieved. Jørgensen also notes optimism on the USA’s potential for driving the green agenda forwards, bolstered by Joe Biden’s promise to re-enter the Paris Climate Accord.
Biodiversity Risk, Natural Capital and actuarial practice
The IFoA's Biodiversity and Natural Capital Working Party (a volunteer group working under the Sustainability Board) has published a blog in conjunction with its paper on the importance of biodiversity risks. The Working Party intends to foster debate within the actuarial community on biodiversity risks, develop thought leadership and input into government consultations.
Tools capable of assessing the impact of investment decisions on the environment need to be developed as we potentially transition towards a sustainable low-carbon economy. To this end, the Working Party intends on developing a case for a more detailed research study on the ‘Natural Capital’ approach, whereby nature is valued based on the natural resources it contains and the environmental services it provides for economic and social well-being.
We Urgently Need ‘Scope X’ Business Leadership for Climate
In this opinion piece, Solitaire Townsend, author and co-founder of Futerra, sets out her vision for ‘Scope X’ companies. Her proposal builds on the concept of Scope 1, 2 and 3 emissions, which are set by the Carbon Disclosure Project for classifying carbon emissions.
Solitaire believes that in order to be truly sustainable, businesses need to consider “Scope X – work that restores and regenerates, that rebuilds the foundations of healthy ecosystems and thriving communities, that takes responsibility for system level emissions.” She argues that businesses cannot expect to enjoy the rights of power and influence over societies and ecosystems without also taking a lead role in keeping those societies and ecosystems functioning, and that not only is this the right thing to do, but that it also makes sound business sense.
Making old buildings resilient to climate change requires new financial tools
In the battle to reduce the impact of human energy use on the environment, not only must we transition towards the use of more renewable energy resources, but it is also important to make sure that the energy that we do use is not going to waste.
In this podcast Donnel Baird, BlocPower’s founder and CEO, speaks about the work that his company is doing using software to identify buildings that are prime candidates to receive more efficient energy systems. He also speaks about the financing of these energy efficiency projects and a future where this financing could form a new asset class for investors including pension funds.
IFoA Sustainable Development Goals (SDG) podcasts On Demand
The UN set out 17 Sustainable Development Goals (SDGs) in 2015 at the United Nations General Assembly, with the aims of protecting the environment and ending social deprivation. This IFoA podcast series interviews prominent experts and examines the role that actuaries can play in achieving the SDGs.
Episode 1 - How can actuaries contribute to achieving the SDG's? This episode gives a general introduction to the SDGs, and the role actuaries can play in achieving them. Past President Marjorie Ngwenya considers actuaries to be well placed to address the SDGs given the profession’s skill in handling complex questions around long term global risks. COVID-19 is also discussed in the context of the risk of neglecting the SDGs and the opportunity to reboot the economy in a way that addresses the now heightened issues of poverty, healthcare, education and the climate emergency.
Episode 2 – Biodiversity. In 2020, the World Economic Forum ruled biodiversity loss as one of the planet’s top 5 global risks, in terms of both severity and likelihood. This episode highlights that 55% of global GDP is dependent on biodiversity and services from the ecosystem. Nick Spencer, Chair of the Sustainability Board with guests Aled Jones (Global Sustainability Institute) and Gillian Rutherford (Swiss Re) discuss progress in acknowledging links between ecology and economics, including multi-disciplinary opportunities to mitigate biodiversity risks. For example, mapping ecological profiles within risk assessment tools for risk selection in reinsurance. Through acknowledgement of biodiversity as a key risk, actuaries can use their modelling, data interpretation and ability to consider complex, interconnected problems as holistic issues to drive change.
Over the last 50 years global wildlife populations have declined by as much as 60%. In its Global Risks Report 2020, the World Economic Forum ranked biodiversity loss and ecosystem collapse as a top-five risk, above pandemics, cyber attacks and financial crises. Nature and biodiversity underpin the global economy today and so a threat to biodiversity presents not only an ecological risk but a financial risk as well (the WWF predicts a loss of $10 trillion in global GDB between 2011 and 2050 if current biodiversity loss trends continue). The loss of healthy ecosystems contributes to two other key global risks: climate change and pandemics. Deforestation, for example, is responsible for 30% of global greenhouse gas emissions each year. Biodiversity loss also increases contact points between people and wildlife leading to the transmission of pathogens from animals to human hosts.
Actuaries are well placed to consider the impacts of biodiversity risks given that these risks are long-tailed, uncertain and difficult to quantify. They also have a professional duty to take account of biodiversity risks in their advice as it presents a material financial risk across all areas of actuarial work. It exacerbates natural catastrophe losses leading to an increase in claims across general insurers' liability, home and motor lines of business. Life insurance businesses are affected by changes in long-term mortality trends (e.g. increased air pollution and the likelihood of pandemics). Reductions in asset values resulting from biodiversity loss strain pension funds' balance sheets.
2020 Scorecard on Insurance, Fossil Fuels and Climate Change
Insurers, as society’s risk managers, have a responsibility to actively support the Paris Agreement and global action to avoid climate breakdown. They have the power to drive the transition to a low-carbon economy and strong business reasons to do so. The Insure Our Future campaign’s fourth annual scorecard on the industry’s response to climate change reveals that insurers around the world are continuing to retreat from coal, and this is having a tangible impact on coal mining and power companies. However, this momentum is not keeping up with the escalating climate crisis. Major companies in the U.S., the Lloyd’s market and East Asia are still insuring coal, and the insurance industry has so far failed to take comprehensive action on oil and gas, although there are signs this is starting to change.
Insuring Our Future analyses the evolving role of the global insurance industry in the transition to a low-carbon economy. It focuses on 30 leading insurers, assessing and scoring their policies on coal, oil and gas insurance, divestment and other aspects of climate leadership based on a survey with more than 40 questions. The report highlights progress, calls out leaders and laggards and identifies challenges and opportunities for the year ahead.
Communication is at the heart of shifting mindsets on climate and sustainability issues, and is vital in highlighting and understanding steps we can take as finance professionals to implement positive change.
The purpose of Sustainable Finance Community is to encourage members to read, share and discuss content, in order to help us with this aim. We want to encourage information to flow both ways, so please get in touch by replying to sustainablefinancecommunity@gmail.com or follow us on LinkedIn and Twitter.
This initiative is brought to you by the Institute and Faculty of Actuaries (IFoA) Sustainability Board (formerly Resource & Environment Board). The Sustainability Board is a group of voluntary actuaries working with the IFoA to encourage change within finance. We work alongside - but separately to - the IFoA and as such this is not an IFoA communication. Find out more about the IFoA Sustainability Board here.
The weekly newsletter summarises information from different sources for the benefit of subscribers. While we take care to select articles, papers and opinions from reputable sources, we do not perform independent verification and hence these summaries should not be relied upon for any purpose. Further, the statements, opinions and conclusions that are summarised within the newsletter do not necessarily represent the views of the IFoA nor the newsletter authors and their employers.
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