COP26: Risk management “central” to climate mitigation

A paper from the University of Cambridge Institute for Sustainability Leadership (CISL) launched at COP26 urges policymakers, financial regulators and industry to expand risk sharing systems at scale to tackle the Climate Emergency.

To share climate risks at scale, those risks must be measured consistently. Within risk-sharing systems, the insurance sector (premium-based risk-sharing) has unique risk quantification and management skills, overseen by regulation.

The report proposes these approaches spread across wider financial regulation, from microfinance to global financial institutions, to achieve a climate-smart financial system.

Youssef Nassef, director, Adaptation Division, UNFCCC said in the report foreword : “At a time when rapid transformative action is essential to address the climate emergency, this inspiring report highlights the centrality of risk management in climate change mitigation and adaptation, and points to the unique contribution of the insurance industry and regulators to a better understanding of climate risks, and to building a resilient future.”

The report asserts that to manage risks, they have to be shared. It proposes twenty concrete steps to urgently govern, manage, and reduce climate risks for a just, resilient transition to net zero in developing and developed countries.

Bronwyn Claire, Sr Programme Manager for insurance leaders group ClimateWise said: “COP26 leaders gathered in Glasgow have the opportunity to recognise the importance of risk sharing to support the transition to a resilient, net zero economic and finance system.”

”Robust disaster risk recovery and net zero aligned economy and society depends on the framework of the financial system reflecting the impact and future implications of climate risk.”

Pooling of resources is vital

Modern risk-sharing systems include social protection, informal community networks and the insurance industry. Each has crucial roles that can be applied to the climate crisis.

These systems together cover approximately one third of global GDP. However, their distribution is uneven and where they do exist, the response allocated to climate risks is minimal.

Writing in the foreword to the report, Mark Carney, UN special envoy on Climate Action and Finance said: “In the face of the unfolding climate emergency, this report provides a timely and valuable overview of the lessons we can already draw from the global insurance system - across public, private and mutual sectors - and the opportunities for that system to help increase our systemic resilience to the worst effects of climate change. 

“The global financial system is leading the way in the run up to COP26. This collaboration between senior regulators, policymakers and industry extends that leadership by informing a pathway beyond Glasgow that aims to secure a smoother and more equitable transition to a resilient, zero-carbon future.”

Risk Sharing in the Climate Emergency builds on the extensive work and insights of its insurance leaders group ClimateWise and highlights the following five key areas of action for policymakers, private and public financial authorities and the insurance sector.

• Policymakers - reinforce financial inclusion and sustainable development priorities within insurance regulators’ mandates to meet the climate objectives;
• Financial markets beyond insurance - accelerate consistent physical climate risk quantification through insurance experience, methods, metrics and resources;
• Public and private financial authorities - massively expand risk-sharing pools across financial systems to manage global-to-local and intergenerational climate risks;
• Insurance regulators and climate authorities - explore ways for UNFCCC and IAIS members to co-operate on shared climate risk objectives;
• Insurance sector - become pioneers of climate-related disclosures, prudential supervision and climate stewardship;
• Academia and NGOs - research the role of the insurance system in managing the social risks of the net zero transition.

The report is co-authored with global law firm Clyde & Co, and Geoff Summerhayes, executive board member, APRA (2016–20) and chair, Sustainable Insurance Forum (2018–20).

Nigel Brook, partner at Clyde & Co said: “The transition to a net zero economy will require an unparalleled level of investment in new technology and infrastructure that will require complex financial and risk transfer solutions developed and delivered at unprecedented speed.”

”Beyond the products they provide, insurers have the knowledge, expertise and skills to play an invaluable role in building resilience and addressing the risks associated with the climate emergency.”

”In dealing with this issue, policymakers’ focus to date has mainly been on the banking and investment side of the financial services industry; they now need to broaden that focus to include insurance.”