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How can European companies find opportunities in a low carbon economy?

About a third of the Netherlands, my home country, lies below sea level. Historically, we have relied on dykes and sea barriers to reclaim wetlands and marshlands, and protect our flood-prone land. 

Now, climate change is threatening all that. In common with many of the world’s lowland areas, rising sea levels, storm surges and more extreme, wetter weather is creating a huge challenge. Vast swathes of land are at risk of being engulfed by water. 

Much of the Netherlands’ population – and economy – is dependent on this reclaimed, low-lying land. So, for me, the need to tackle climate change and the importance of sustainability is particularly relatable.

But without such clear examples on your doorstep, it can be easy to underestimate the impact that climate change will have on our daily lives and wellbeing.

Swiss Re Institute's recent Economics of Climate Change report makes it clear, however, this is a problem that we all have to contend with. 

Based on our current temperature rise trajectory, Europe’s economy is set to be around 8% smaller by mid-century than it would be in a world without climate change.

Globally, this figure rises to about 11 or even 14%. 

Note: Temperature increases are from pre-industrial times to mid-century, and relate to increasing emissions and/or increasing climate sensitivity (reaction of temperatures to emissions) from left to right. Source: Swiss Re Institute

Avoiding the worst of this impact means taking significant steps now to put us back on track for the Paris Agreement and limit global warming. Individuals, governments and corporates all need to play their part in bringing environmental, social and governance (ESG) considerations to the fore. There are some positive signs – including the recent European Green Deal – to make the continent’s economy more sustainable. But there is a long way to go on the journey to a lower carbon future – and the transition itself brings its own risks.

Risk and reward

There is clearly no one-size-fits-all approach to decarbonisation. For some industries it will be harder than others and there will be challenges all along the supply chain. It will more likely than not require large investments. But it also presents large opportunities.

The International Energy Agency estimates that, between now and 2023, a global annual investment of USD 1 trillion – about 0.7% of current global GDP – could add 1.1 percentage points to economic growth.

It would also save or create roughly 9 million jobs a year. And greenhouse gas emissions could be put into terminal decline, with 2019 becoming the high water mark.

Meanwhile, a recent paper from the International Monetary Fund highlights that the economic multipliers of green spending, on areas like renewable energy, are significantly higher than those associated with non-eco-friendly expenditure.

The insurers’ role

The insurance industry has a key role to play in helping companies realise those benefits, providing specialist risk transfer knowledge and also supporting long-term investment in innovation and transition strategies. There are two main ways it can do this.

Firstly, the industry is able to de-risk investments made into renewables. Swiss Re Corporate Solutions is already taking steps to accelerate solar adoption through the Solar Revenue Put, which drives down investment risk. And at the end of 2020, we were providing risk cover to more than 5,600 wind and solar farms, avoiding over 22 million tonnes in CO2 emissions.

Secondly, insurers can support innovation and the development of new climate-resistant technologies. This includes both risk transfer solutions and adding value by applying risk insights and expertise. 

For example, we offer risk assessments and we advise on new ways of storing energy. Systems using lithium-ion technology, for instance, are a good source of reliable on-site energy that can reduce or eliminate the need for fossil fuels. But they also bring with them property risk considerations, and the potential for business interruption. 

The building sector provides another good example here. There is a hugely increased focus on green materials, cutting emissions and energy usage when it comes to the materials used, as shown by the increasing trend for green roofs. But there is little long-term experience of these materials, and they pose new risks that risk managers, brokers and underwriters need to discuss. 

Making transition opportunities a reality

Transition risks and uncertainty will also be influenced by policymakers and the speed with which new regulations are brought into force. Additionally, technological advancements will have an obvious impact.

The auto manufacturing sector, for example, could see losses of 5 to 20% of value depending on the relative contributions and changes in cheaper renewables, carbon capture and storage, and energy efficiency gains – according to the Economics of Climate Change report. 

Source: Blackrock Carbon Tax Impact Model, Swiss Re Institute

But it is not just earnings that will be impacted by climate change. Many companies could also see heightened credit risk. Changes to their projected earnings, costs and exposure could affect their debt repayment capacity as well as devaluing existing collateral, the report says. Global credit losses from power and oil & gas industries alone could amount to between USD 50 and 300 billion on outstanding debt.

Preparing ourselves for a low-carbon future requires a mindset change from corporates, governments and individuals alike. Pressure will continue to mount over the need to increase transparency around ESG issues. And the need to maintain control over an evolving risk landscape will conquer other concerns such as supply chain transparency.

Against this backdrop, insurers and corporates need to work hand-in-hand to fully understand their exposure, and mitigate the fall-out.

Data-based solutions like Swiss Re's Risk Resilience Center developed for COVID-19 have the potential to help navigate the transition risk related landscape as well, and create transparency.

A warmer planet affects everything: The wellbeing of individuals, future livelihoods and the profitability of companies. So whether or not your homeland is a lowland, this is a challenge we must all tackle together with renewed determination.

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