Ditching investments in fossil fuel businesses—and denying them insurance—aren’t the only ways for the insurance industry to participate in the drive to net zero greenhouse gas emissions, according to representatives of global insurers and reinsurers.
Even those companies that are continuing to insure the oil and gas industry can push the global transition to net zero forward by helping facilitate the growth of essential carbon removal technologies, they say.
But the insurance market for carbon removal is still in its early stages, as insurers tread carefully given the lack of loss history in an emerging sector. (See related article: The Global Urgency of Building the Carbon Removal Industry for how the insurance industry can help build the carbon removal sector.)
Some companies, such as Chubb, are continuing to insure oil and gas while also helping to push net zero transition. Chubb has exited the insurance of coal and tar sands, which have “true sustainability issues,” but is continuing to insure oil and gas because the world doesn’t yet have “great alternatives,” according to CEO Evan Greenberg, who spoke at the recent 38th Annual S&P Global Ratings Insurance Conference.
He said Chubb is developing products to support industries “that are either helping companies and individuals reduce their carbon footprint or create new technologies that produce energy that are carbon free.”
“The insurance industry is perfectly positioned to help facilitate the growth of the carbon removal industry via derisking, financing and purchasing new carbon removal services,” said Mischa Repmann, senior sustainability risk manager at Swiss Re, in an interview.
“This is where re/insurers with appetite for the journey can play to their strengths,” said a Swiss Re Institute report titled “The insurance rationale for carbon removal solutions,” which was published in July 2021.
Three Transition Levers
As risk takers, institutional investors and buyers, Swiss Re said, insurance and reinsurance companies can help scale up the carbon removal industry in three ways:
- Providing risk management knowledge and transfer solutions, as well as insurance capacity for evolving risk pools.
- Providing capital as an institutional, long-term investor.
- Stimulating the market as a buyer of green products and services to run their own operations.
For example, insurers can improve “the bankability of carbon removal projects by providing compensation for losses in the case of adverse events,” the report said. It explained that standard engineering policies, such as contractors all-risk policies, “can cover the construction, operation and deconstruction risks of carbon removal facilities (for air filters, CO2 pipelines or injection rigs, among others).”
In addition, standard property insurance can protect technology infrastructure and natural assets like forests against natural disasters, the report added. “More challenging are potential long-term liability exposures arising from the risk of carbon storage reversal.”
As institutional investors, insurers also can invest in green bonds, which can be used to finance wind farms, and they can provide financing for carbon removal projects and infrastructure. “Carbon removal is a long-term investment opportunity through which re/insurers can balance their long-term liabilities, and run a net zero emissions asset portfolio strategy,” said Swiss Re.
And last but not least, as buyers of green products, insurers can choose to source 100% of their own power consumption from renewable sources or be early buyers of carbon removal certificates “to balance their own operational footprint in pursuit of net zero emissions.”
“That footprint is small relative to other sectors, making first-mover removal projects more affordable. By entering long-term offtake agreements and guaranteeing future revenues, re/insurers can be strong partners for the carbon removal industry while also gaining access to its new risk pools and asset classes,” the report went on to say.
Undeveloped Insurance Market
Despite the possible business opportunities connected to carbon removal solutions, a related insurance market has yet to take off.
“All told, with carbon removal processes still in early stages of development, the structuring and pricing of insurance offerings for the industry will remain challenging for some time. More projects, performance data and loss history are needed for insurers to build credible loss expectations,” said Swiss Re.
There are also barriers to the asset management and investor side of insurance, as a result of the immaturity of the market and the lack of insurance offerings and institutional support that would alleviate some of the investment risks, the reinsurer said.
“It is unlikely that any potential insurer or other investor would go into carbon removal alone. Instead, investors look for opportunities for sidecar investments, for instance, alongside the oil and gas majors already investing in the transition to net zero. This could smooth initial fears about the maturity of the market,” the report confirmed.
As a buyer of carbon removal services, insurers that take the risk and engage early in carbon removal may find their investments well rewarded, it said. “At first, they may increase their understanding of the new carbon removal risk landscape by offering standard products for the easy-to-cover exposures, by investing at a small scale and by entering long-term offtake agreements with select carbon removal providers.”
(An offtake agreement is a contract to commit to buying future carbon removal credits from existing or planned carbon removal facilities at set price points several years into the future, according to Puro.Earth, a business-to-business carbon removal marketplace. This type of contract recognizes the uncertainty for delivery—a consequence, for example, of being very early-stage or needing to build a new plant—so the funding helps fledging developers start operations or expand existing operations).
When the market matures and the risk knowledge is built, “liability covers for carbon removal services—currently considered uninsurable by many—may also become standard business,” the report said. “At that point, the front-runners among insurers will profit from the on-the-ground experience already gathered.”
To enable liability insurance solutions for storage reversal events (see accompanying textbox for examples), insurers need to be able to build reliable expectations about worst-case loss scenarios, said Swiss Re. “Insurance solutions offered by the private sector would likely be limited to shorter terms and with diverse exclusion clauses. Covering long-term liabilities would likely be left to public sector solutions, possibly in partnership with the private sector.”
The magnitude of the task ahead to net zero is daunting. Limiting global warming to 1.5°C will require greenhouse gas emission cuts of 50% by 2030 and net zero emissions by 2050, according to the Intergovernmental Panel on Climate Change (IPCC). The goal of the 2015 Paris Agreement was to limit average global temperatures to well below 2°C (3.6°F), and preferably to limit increases to 1.5°C (2.7 °F) above pre-industrial levels.
Even with the best efforts to cut emissions, after 2050, there will be residual carbon release, which means that emissions will not reach absolute zero in the 21st century, the Swiss Re report warned.
As a result, time is of the essence.
“The carbon removal industry has to scale up “at an unprecedented speed,” the report added. “[S]caling the deployment of carbon removal technologies and activities will be central to keeping global warming at safe levels over the long term.”
To reach net zero and prevent the worst impacts of a warming world, “the carbon removal industry will have to scale from some 10,000 tonnes of negative emissions today to around 10 billion tonnes [each year] by 2050,” which is a quarter of what is emitted each year today, the report said.
“It will take time to build that capacity, and work needs to start today, parallel to (not instead of) stringent emission reduction efforts. Later this century, it will take up to 20 billion tonnes of negative emissions each year to stay on track with the 1.5°C global warming target,” the report continued, noting that 20 billion tonnes corresponds to today’s emissions from oil and gas products in one year.
“The expected transition to a lower-carbon economy is estimated to require around $1 trillion of investments a year for the foreseeable future, generating new investment opportunities,” according to the Task Force on Climate-related Financial Disclosures, which was formed by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks and investors in providing information to stakeholders.
Carbon in the atmosphere can be captured and stored in different ways. The lowest cost options involve nature-based solutions such as sequestering carbon in forests, wetlands, oceans and soil, which carry a risk of storage reversal in the cases of wildfires, floods and illegal deforestation.
On the other hand, there are also technical solutions—many still in the early stages of development—that “use industrial processes to remove atmospheric CO2 for capturing, storage or both.”
“CO2 can be filtered from the atmosphere and used as commercial goods in long-lived products like concrete. It can also be contained and mineralized in underground rock layers, for instance in depleted oil and gas reservoirs. The corresponding implementation costs are higher than for nature-based solutions because the existing technological approaches are under-deployed and new ones are under-developed. Importantly, however, the risk of reversal is lower,” said the report. (See related article: The Global Urgency of Building the Carbon Removal Industry, for more on these technical solutions.)
“We all need to do our best and remove the rest. In other words: reduce, reduce, reduce, and in parallel, balance the unavoidable emissions through carbon removal. When it comes to removals, let’s use nature-based solutions wherever sustainably possible to achieve their wealth of co-benefits for the natural and human environment. At the same time, we need to invest in the more scalable and durable technological solutions like direct air capture to limit global warming over the long run,” said Repmann in a statement accompanying the report. (With direct air capture and storage, CO2 is filtered directly from ambient air, compressed and then injected into geological formations deep underground for permanent storage, the Swiss Re report explained.)
“We need to abate and then offset the hard-to-abate emissions,” agreed Gabrielle Durisch, head of Sustainability for Commercial Insurance at Zurich Insurance Group, in an interview.
Zurich did just that recently when it signed carbon removal agreements with several suppliers of carbon removal solutions such as biochar, which is formed from heating biomass in the absence of oxygen (also known as pyrolysis). Zurich announced it has made advanced payments to help these suppliers further develop, scale and commercialize their early stage and innovative technologies. (Related article: The Global Urgency of Building the Carbon Removal Industry)
Swiss Re described biochar as a hybrid carbon removing solution that seeks to combine and reap the benefits of different features of nature-based and technological approaches. Technology is better at converting CO2 into durable forms of storage, Swiss Re added.
“Carbon removal will need to evolve into a multitrillion-dollar industry akin to the value of the oil and gas industry today if we are to hit the climate targets set out by the 2015 Paris Agreement,” said Christoph Nabholz, chief research officer at Swiss Re Institute, in a statement. “Serious investment in this nascent industry must start now. Failing to tackle climate change could result in global GDP loss of 18%…No action is not an option.”
Of course, there are risks and opportunities associated with the transition to net zero, as nations and industries work to reduce their reliance on oil and gas.
“[O]rganizations can be vulnerable to several types of climate-related transition risks: a) policy and legal risks reflecting changes in policy and litigation action; b) technology risk as emerging technologies impact the competitiveness of certain organizations; c) market risk from changes to supply and demand; and d) reputational risks tied to changing customer or community perceptions,” according to the Financial Stability Board.
Some organizations will be more significantly affected by transition risks—such as fossil fuel-based industries, energy-intensive manufacturers and transportation activities, while other organizations will be more affected by the physical risks of climate change: agriculture, transportation, building infrastructure, insurance and tourism, according to the Task Force on Climate-related Financial Disclosures.
“Some transition risks will be mitigated by technological advances, but novel technology can in turn also create new risks. The insurance industry has a vital role to play in the transition, by spreading best practice, providing specialist risk transfer knowledge and capacity to partners in other sectors of the economy, and as an enabler for investment in the innovation necessary to make carbon reduction and removal a reality,” said a recently published report from Swiss Re SONAR titled “New emerging risk insights.”
An article published in July 2021 by ESG software specialist Diligent provided some examples of transition risks:
- Changed land-use policies or water conservation practices impacting the agricultural sector.
- The costs the energy industry faces in developing low-carbon technologies.
- A reduction in the value of investments in carbon-heavy industries.
- The requirements of additional regulation and reporting.
“Transition risks can occur when moving toward a less polluting, greener economy,” explained the Bank of England. “Such transitions could mean that some sectors of the economy face big shifts in asset values or higher costs of doing business.”
The BoE emphasized it’s not that policies promulgated at the Paris Climate Agreement are bad for the economy. Indeed, the risk of delaying the transition to net zero “would be far worse. Rather, it’s about the speed of transition to a greener economy—and how this affects certain sectors and financial stability,” the BoE continued.
“One example is energy companies. If government policies were to change in line with the Paris Agreement, then two-thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investments held by banks and insurance companies in sectors like coal, oil and gas,” the bank said.
“While the physical risks from climate change have been discussed for many years, transition risks are a relatively new category. Some firms are now choosing to reduce investments into sectors like coal to help manage these risks.”
The bank also pointed to liability risks, which would come from people or businesses seeking compensation for losses they suffer from the physical or transition risks of climate change.
“Suppose investors back a business which goes on to make a loss due to climate-related events. There may then be a question as to whether the business had provided enough information about its exposure to these climate-related financial risks. If investors felt this information had not been provided, they might make a claim against the business,” the BoE explained.
The Swiss Re report noted that certain industries will be more difficult and more expensive to decarbonize.
“Large quantities of fossil fuel reserves and resources are likely to become ‘unburnable’ or stranded if countries around the world implement climate policies effectively,” said an article published in November 2021 by Nature. The article noted that the transition is already under way and stranded fossil fuel assets of between $7 trillion and $11 trillion could arise between 2022 and 2036.
However, the push to net zero is also creating opportunities, both for companies and their investors, said Natalie Ambrosio Preudhomme, director, Moody’s ESG Solutions, in a webinar on transition risks held in April.
“Firms that capitalize on technological developments stand to benefit from more efficient processes and thus often reduced costs as well as increased reputation and potentially market share,” she said.
“For example, Ford shares rose 12% to their highest levels in 21 years after it announced increased production capacity for its electric F-150 pickup,” she added. “So, how a firm will be affected by the transition to a low carbon economy depends upon many factors beyond its greenhouse gas emissions.”
This article is one of several in Carrier Management’s midyear 2022 digital magazine that is focused on climate change risks. (Carrier Management is Insurance Journal’s sister publication that is focused on the C-suite.)
- Midyear Update 2022: Transitions
- Insurance Industry Support of Carbon Removal Needed in Drive to Net Zero
- Insurers Brace for SEC Climate Risk Disclosure Rules
- Chubb Not Declaring Itself Net Zero
All of the articles in the magazine are available on the magazine page of the Carrier Management website.
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