Climate change adaptation and mitigation are two sides of the same coin. They can be both viewed from a risk reduction lens. Adaptation and building resilience entails coping with the physical impacts of climate change through, for example, disaster risk reduction measures and insurance as a financial shock absorber. Climate change mitigation and the transition to a net-zero emissions economy can also be viewed as risk reduction as it addresses the root cause of climate change – greenhouse gas emissions. Therefore, insurance can also be a lever to support the decarbonisation of the real economy.
At the UN Environment Programme (UNEP), we believe the insurance industry has a triple role – as risk manager, insurer and investor – in building climate-resilient communities and supporting the transition to a net-zero emissions economy. Addressing both climate resilience and the net-zero transition – and across both sides of an insurance company’s balance sheet – is a coherent and holistic approach to climate risk management.
In this context, UNEP has a range of pioneering insurance initiatives that build climate resilience and accelerate and scale up the net-zero transition.
Enhancing climate risk assessment
In 2019, UNEP’s Principles for Sustainable Insurance Initiative (PSI) started a global, multi-year process that convened 22 leading insurers and reinsurers from around the world to pilot state-of-the-art climate risk assessment approaches – particularly the use of climate change scenarios – to better assess climate-related physical, transition and litigation risks in the insurance business.
The overall aim of the PSI pilot project was to contribute to the development of consistent and transparent analytical approaches that can be used to identify, assess and disclose climate change-related risks and opportunities in insurance underwriting portfolios in a forward-looking, scenario-based manner. This led to the launch of the 2021 PSI global report, Insuring the climate transition: Enhancing the insurance industry’s assessment of climate change futures. The 2021 PSI global report inspired a similar effort in Brazil and led to the 2024 report, Insuring the climate transition in Brazil, a collaborative effort to enhance climate risk assessment involving the PSI and the country’s insurance association the Confederação Nacional das Seguradoras, with technical support from Latin American sustainable finance consulting and evaluation practice Nint. With the PSI project’s success in Brazil, similar efforts are being planned in other countries.
Protecting MSMEs
To help close the insurance protection gap, the PSI has a unique partnership with the Vulnerable Twenty Group of Ministers of Finance (V20). The V20 – originally 20 and now 68 climate-vulnerable nations in the global south – has a combined population of 1.7 billion, a 5% share of global emissions and GDP of $3.8trn.
A 2022 V20 report revealed within a span of two decades (2000 to 2019), climate change wiped out 20% of the collective GDP of V20 economies. Micro, small and medium-sized enterprises (MSMEs) are the backbone of V20 economies. They contribute 20% to 70% of GDP and export revenues and make up more than 80% of businesses. But MSMEs are constantly threatened by escalating climate risks.
Insurance can enhance risk management, absorb financial shocks and derisk cost-saving renewable energy and energy efficiency infrastructure. At the V20 Asia-Pacific meeting in Manila in 2017, I broached the idea of the world’s first vulnerable country-led insurance facility of its kind and conceptualised the V20 Sustainable Insurance Facility (V20-SIF). Working together with the V20 and Munich Climate Insurance Initiative in the ensuing years, we announced the V20-SIF at the 2021 UN Climate Conference (Cop26) – a project pipeline development facility to assist V20 economies scope the financial protection needs of MSMEs and facilitate concept and proposal development for funding vehicles.
By speeding and scaling up a just transition to climate-resilient and inclusive communities and net-zero and nature-positive economies, insurers can play a key role in tackling the triple planetary crisis of climate change, nature and biodiversity loss and pollution and waste, which require urgent and ambitious action
A V20-SIF office hosted by the PSI was then set up with funding from Germany’s economic development ministry, the Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung, and we completed our global team of experts last year. This is why at the 2023 UN Climate Conference (Cop28), having developed a pipeline of projects spanning Africa, Asia-Pacific and Latin America and the Caribbean, we shared lessons in the V20-SIF journey.
For example, we believe “demand aggregators” – such as banks, microfinance institutions, digital platforms and agriculture buyers – are key to insuring MSMEs that form part of supply chains and loan portfolios. MSMEs are highly vulnerable to climate risks, creating costs to larger companies (demand aggregators) that trade with and rely on MSMEs to produce or sell goods or repay loans. Demand aggregators’ financial performance is impacted by MSMEs’ risks and most want to offer insurance. But costs in serving MSMEs – whether via demand aggregators, brokers or insurers – is a major barrier and must reduce significantly.
The V20-SIF’s goal is not to do more market diagnostics or pilots, but to understand key elements that work and can be replicated to scale and speed up insurance solutions that build climate-resilient MSMEs, in line with the underlying tenet of the UN Sustainable Development Goals of leaving no one behind. More V20-SIF developments will be announced soon as it moves into its next level of implementation this year.
Accelerating and scaling net zero
In April, UNEP announced the creation of the Forum for Insurance Transition to Net Zero (FIT), a new UN-led and convened structured dialogue and multi-stakeholder forum to support the necessary acceleration and scaling up of voluntary climate action by the insurance industry and key stakeholders.
The creation of the FIT is a major new opportunity for UNEP, the insurance industry and key stakeholders; and takes into account the experience gained by UNEP’s previous work with the insurance industry that first transformed net-zero insurance from theory to practice. In creating the FIT, UNEP met with a wide range of key stakeholders to discuss practical and effective ways in which insurance can support and accelerate the transition to a net-zero emissions economy. These consultations have validated a clear and urgent need to create a new, multi-stakeholder forum and have also identified work priorities.
There are 19 founding re/insurance organisations in the Forum for Insurance Transition to Net Zero:
As UNEP’s head of insurance, I am honoured to chair the FIT. The FIT will work with insurance market participants (for example, insurers, reinsurers and brokers) and engage with insurance regulators and supervisors, net-zero standard-setters and initiatives, the scientific and academic community, civil society and other key stakeholders (for example, sustainability disclosure initiatives and real economy actors) to advance net-zero insurance thinking and practices globally.
Initial priorities for the FIT include advancing frameworks for net-zero insurance metrics and voluntary targets and developing new net-zero insurance concepts; developing a net-zero transition plan framework for insurance market participants; engaging with the real economy on the development of net-zero transition plans by corporates across different sectors; and tackling challenges and opportunities to develop insurance solutions and taxonomies that would support the net-zero transition. The aim is to foster availability of insurance and finance for transition projects and technologies and net-zero activities.
Overall, the FIT is kickstarting its work with a critical mass and diverse group of 46 organisations from across the globe, made up of 19 insurers and reinsurers, 16 insurance regulatory and supervisory authorities and 11 renowned academic institutions and civil society organisations. It is expected more organisations worldwide will join the FIT in the coming months as it becomes fully operational.
Tackling nature loss and pollution
The world is facing a triple planetary crisis of climate change, nature and biodiversity loss and pollution and waste. Net zero and nature positive are two sides of the same coin, just like climate change adaptation and mitigation.
The Nature Positive Initiative defines nature positive as a global societal goal to “halt and reverse nature loss by 2030 on a 2020 baseline and achieve full recovery by 2050” and “it means ensuring more nature in the world in 2030 than in 2020 and continued recovery after that”. The science is clear. The world cannot reach net zero without becoming nature positive. Neither climate change nor biodiversity loss will be solved in isolation as they mutually reinforce each other and are interconnected.
With the adoption of the Kunming-Montreal Global Biodiversity Framework in 2022, as well as the ongoing inter-governmental process to forge an international legally binding instrument to end plastic pollution, there is a growing recognition of the importance of finance, including insurance, for nature, both in reducing nature-related risks and seizing nature-positive opportunities. Insurers can play a key role to halt and reverse nature loss so by 2030 nature is visibly and measurably on the path to recovery.
Ever since it was established in 2012, the PSI has been addressing nature-related and pollution risks – from tackling illegal, unreported and unregulated fishing, environmental pollution liability, plastic pollution and high-impact hydropower projects; to protecting Unesco World Heritage Sites and building climate resilience by protecting ecosystems such as coral reefs and mangrove forests.
Nature-related and pollution risks were also included in the first-ever environmental, social and governance guides for non-life insurance and life and health insurance that were produced by the PSI. This is why in 2021, I conceptualised the agenda-setting Nature-Positive Insurance Series co-organised by the PSI and the UN Convention on Biological Diversity. This was followed in 2023 by the paper, Nature-positive insurance: Evolving thinking and practices, produced by the PSI and UNEP Finance Initiative’s Nature Team.
The paper identifies how insurers can contribute to achieving the goals and targets of the Global Biodiversity Framework through a range of possible actions, from embedding nature in risk management frameworks and setting underwriting criteria and guidelines; engaging with clients and potential clients; and developing insurance products and solutions that cover natural ecosystems and economic activities that value, conserve, restore and wisely use biodiversity and ecosystem services.
This year, to advance nature-positive insurance thinking and practices globally, we are launching the PSI Nature-Positive Insurance Working Group, which I announced at the inaugural Global Sustainable Insurance Summit in Los Angeles in April and which will contribute to the aims of the 2024 UN Biodiversity Conference (Cop16).
By speeding and scaling up a just transition to climate-resilient and inclusive communities and net-zero and nature-positive economies, insurers can play a key role in tackling the triple planetary crisis of climate change, nature and biodiversity loss and pollution and waste, which require urgent and ambitious action by all actors in society to protect lives, livelihoods and assets. By doing so, insurers can also seize the unprecedented generational opportunity to build a safer, healthier, prosperous and sustainable future for all.
Butch Bacani is head of insurance at the UN Environment Programme, programme leader of the UN Principles for Sustainable Insurance and chair of the UN Forum for Insurance Transition to Net Zero
