Jan 8, 2021

McKinsey: Insurance could help fight climate change

Climate Change
Green economy
William Girling
3 min
McKinsey: Insurance could help fight climate change
Earlier this week, we explored Artemis’ research on the growing cat bond insurance market, which reached US$11bn as of last year...

Earlier this week, we explored Artemis’ research on the growing cat bond insurance market, which reached US$11bn as of last year.

Combined with Swiss Re’s study of natural catastrophe-related claims in December, a primary antagonist to insurance’s future potential has been defined: climate change.

In a timely new post, McKinsey & Co discussed this very topic, not only exploring the ramifications of its effects in the short- and medium-term but also the long-term changes that insurance itself could help bring about to reduce its impact.

Investing in the green economy

Dickon Pinner, Senior Partner and Global Leader of McKinsey’s Sustainability practice, stated that a “big switch” has occurred in those taking a leadership role in the debate. Whereas once it was the energy and automotive sectors, finance, particularly banking, has sparked the exploration of how severely climate change could affect economies.

“People are very interested in how to invest and put new money to work into the kind of new green economy. And then insurance within that plays a critical role in terms of transferring and mitigating risk.”

The environmental deterioration that has seen frequent and devastating wildfires in Australia and California, USA, could be the writing on the wall that historical models of predictive insight no longer hold true. Kia Javanmardian, Senior Partner, is ambivalent about how this will ultimately change contemporary attitudes:

“There’s a bit of difference in opinion on ‘Can I just price this in over time?’ versus ‘Do I need to make a more proactive stance?’ And I think the jury is a bit out in terms of where the industry is leaning on that dimension.”

Antonio Grimaldi, Partner, considers that insurers are, in general, beginning to move in the right direction to address the issue. However, he caveats, there is still much more to be done, from increasing resilience across the board to developing new underwriting solutions that cater to new market conditions.

Javanmardian adds that insurers becoming more conscious of their investment portfolios could also be a significant step: 

“We’re starting to see a bit of thinking in terms of what they’re willing to put money behind, partly reputationally, partly as an ESG measure. I think it is more pronounced in Europe than in the US, given the regulatory environment.”

Collaborating on responsibility

Furthermore, Grimaldi believes that European companies are more actively focused on becoming “responsible” investors and underwriters, “I think this is, in my mind, one of the very interesting angles that the industry could utilise in order to overcome some of the short term-ism that the industry might have, given the annual policy cycle.”

Finally, a key point raised by McKinsey as a whole is the necessity for strong collaboration between the public and private sectors to mitigate risk and benefit event preparedness. 

“Even days’ or weeks’ notice of an upcoming event, you can make a material difference if you can prepare for it, but that does require a public-private partnership. So a big role to play on such a complicated topic,” Pinner concludes.

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May 7, 2021

Aviva Investors launch $350m global climate credit fund

Joanna England
2 min
 Aviva Investors launch $350m global climate credit fund
The investment arm of the UK's largest insurer, Aviva plc, have said the fund will support companies invested in climate change mitigation...

 Aviva Investors has launched a climate transition global credit fund and has already allocated US$350m in strategic capital.

The funding, which has been provided by Aviva’s UK and Irish multi-asset funds, will be used to invest in companies offering goods and services that support climate change mitigation and the move towards a more sustainable future. 

According to reports, the fund is in line with Aviva’s ESG philosophy on green policies and the United Nations sustainable development goals. It will be handled by portfolio managers Justine Vroman and Tom Chinery, as well as the noted climate specialist, Rick Stathers.   

Aviva sustainable investment strategy

Companies excluded from the investment fund will be those entrenched in the fossil fuel industry, while enterprises that look at solutions to climate-related problems, such as sustainable transport, renewable energy and environmentally conscious lending, will be targeted. 

Aviva Investors confirmed the goal is to capture transition-oriented companies with low decarbonisation and physical impact risk. 

The initiative will also be benchmarked against the Bloomberg Barclays Global Aggregate Corporates Index, investing predominately in investment-grade companies and a small allocation of up to 5% in high-yield bonds.

Colin Purdie, Aviva Investors chief investment officer for credit, explained, "We can't pivot to a lower-carbon world if all we do is rule out the poor performers and only invest in companies that provide solutions to climate change. All companies need to adjust for a warmer, lower carbon world, which is why we felt it was important to use a wider transition lens to capture a larger set of businesses beyond those with obvious green credentials."

He said, "As investors, it is our responsibility to look beyond small pockets of green finance to engage and mobilise the liquidity of the wider credit market to assist in climate transition and the achievement of net zero carbon emissions."

Purdie added, "Companies that don't adjust their business models will be less attractive to investors and will present a less compelling investment case over time. Climate laggards may find that their financing becomes more expensive than that available to climate leaders."

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