Renaud Guidée arrived at the COP27 climate summit earlier this month with one firm conviction: that the effects of runaway climate change are so catastrophic that everything must be done to slow its course.
Today, his view remains unchanged. And as head of risk at multinational insurance giant AXA, Guidée knows the particular economic threat that a climate emergency poses. Hence his concern at the world potentially overshooting the current global target of a maximum 1.5°C to 2°C temperature rise by 2050.
Indeed, AXA is on record as saying that a 4°C scenario would make vast portions of the global economy uninsurable by the mid-century – a synonym for an “unliveable world”, says Guidée.
“If we can’t insure at all, it just means that it has become inhospitable,” he states. “But my concern about that is not so much as a chief risk officer of one of the biggest insurers in the world; it’s as a citizen and a father of three.”
Even so, Guidée remains remarkably chipper. It is the job of insurers to map out every scenario, he explains. But just because a planetary catastrophe of unparalleled proportion could happen, it doesn’t mean that it will. The key determinant is what is (or is not) done to avert such an eventuality. It’s from this that Guidée takes his confidence.
He cites “bold” climate measures taken by his own employer in the first instance, from AXA’s decision to exit problematic investments (think coal, oil sands and fracking) through to a €26bn (£22.6bn) pledge to invest in green energy infrastructure by 2023.
Cause for hope
But it’s the insurance industry’s collective response to the risk of runaway climate change that fuels his optimism most. He points in particular to the work of the Net-Zero Insurance Alliance (NZIA), a group consisting of 29 leading insurers and representing 14% of the whole sector.
Launched in July 2021, the NZIA has a stated goal of neutralising the carbon footprint of its members’ portfolios by 2050. And doing so will require the full mobilisation of insurers’ dual functions as major asset holders (AXA alone has around €700bn on its balance sheet) and as coverage providers.
“Like other players in the financial services industry, we can use our investments… but the crux is that we must also leverage the other side of our balance sheet, which is the coverage we provide to clients,” says Guidée, who currently serves as chair of the NZIA.
Guidée is adamant that insurers’ self-interest in protecting their clients against climate risks (and thus reducing their liabilities) acts as a powerful incentive to push for a green transition. As he puts it: “We work for the benefit and the protection of our policyholders – and we believe that fighting climate change is in their best interest.”
Unlike many in the financial world, especially equity markets, insurers also prefer stable returns to quick profits, he adds. This habit of being “very sticky” also pushes the industry to engage in the long-term challenge of transitioning to a cleaner economy. The underwriting side follows a similar logic: fewer emissions and more resilience against the impacts of climate change should mean insured parties are safer – and insurers’ payouts are lower.
Likewise, companies and governments that have the backup security that comes from being comprehensively insured are more likely to have the confidence to invest in ambitious climate transition projects. Guidée reasons: “What we do is provide institutional security to the people on the ground, so that when you have insurance you can redeploy your savings to invest in growth and be more entrepreneurial.”
Mind the gap
That’s the theory. But is it working? And, more importantly, is it working where it matters most? Here, the story becomes patchier. Take Africa, which sits at the centre of the climate storm. For all the attention brought by COP27, the region currently faces an 88% “climate finance gap”, according to the specialist development agency FSD Africa.
Exceptions exist. Guidée gives the example of the Sustainable Insurance Facility. Coordinated by the Vulnerable Twenty Group (V20), an alliance of at-risk nations, the facility seeks to develop climate-smart insurance solutions for micro-, small- and medium-sized enterprises in 55 vulnerable economies.
The idea grew out of a concept note by the Principles for Sustainable Insurance (PSI), a collaboration between the insurance sector and the UN Environment Programme’s Finance Initiative – and also home to the NZIA.
The facility received a boost at the recent COP27 climate summit after the V20 partnered with the G7 group of large economies to launch a package of pre-arranged financial support for use after climate disasters. The Global Shield initiative includes a range of insurance instruments, including provisions to cover harvest failures, property damage and interruptions to business operations.
Among the other initiatives under the PSI umbrella, meanwhile, is the Nairobi Declaration on Sustainable Insurance. Launched last year, the initiative’s goals include a commitment to deploy innovative insurance products to enhance the resilience of cities and food systems hit by climate change.
In many developing economies, though, the economic and political risks associated with large-scale finance and insurance are simply too great for commercial providers to step in. As a result, much of the early work has been done by multilateral lenders and development agencies. While these entities have the mandate to act, they lack the deep pockets to do so at scale.
Climate politics also present a hurdle. Poor countries facing unseasonal flooding, sea-level rise and other climate change impacts need support to adapt their economies, not mitigate their emissions (which are typically low). Yet acknowledging as much carries the whiff of failure, as if climate change is already baked in. Guidée infers as much when cautioning against feeding the “beast of cynicism” and risking a “slippery slope” by discussing adaptation.
The power of climate data
With the climate clock ticking, however, change – or the possibility of change – is on the way, the NZIA chair insists.
The first major game-changer sounds unprepossessing: data. But without robust data, insurers struggle to accurately calculate risks, which, in turn, makes them reluctant to insure.
It is “very important” that governments converge on a set of data disclosure norms that are “at least as convergent as possible”, he says. “We know that the transition will take a lot of energy and effort, but we want that energy and effort to be devoted to transformation on the ground, not to reconciling various frameworks.”
For its part, the NZIA recently published a draft protocol setting out proposed rules to help insurers consistently determine science-based pathways to net zero for their investments and portfolios. “This is very important because it’s about setting the ambition and the levers that we will use and providing guidance as to how to gauge the current impact of climate change in terms of emissions,” Guidée explains.
The ripple effects of the insurance industry’s collective shift towards climate consciousness could – and should, according to Guidée – be felt far beyond the sector’s own immediate footprint. Ultimately, what gets insured gets built. And as the global economy looks to transition onto a lower-carbon, more climate-resilient footing, the job of building bold, green business models and physical infrastructure is vast.
Whether the insurance industry helps or hinders in that process will contribute to deciding all our futures.