Climate Change: it's No Longer About Whether, it's About When

by Henri de Castries ALL NEWS  |  Climate
May 22, 2015
Henri de Castries
Chairman & Chief Executive Officer of AXA (2000-2016)

What struck me is the real shift that has operated over the last five years in the way financial actors are thinking about climate change. If one looks back at the climate discussions that took place in Bali or Copenhagen, I am not sure that the financial community was as concerned, whereas today climate change is a well identified priority, both as a risk and as an opportunity.

Over the last two years, the carbon risk debate has shifted from specialist NGOs, think tanks and corporate responsibility circles to activist investors and now to the G20 and the Financial Stability Board.

This signals a clear change in governments' perception of the role financial actors could play. Finance is no longer seen as an "enemy" of sustainable development, but rather as a key driver of the shift towards a low carbon economy. Finance is part of the solution. And I am not talking here only about public finance institutions - which have long been involved in the climate space - but about the commercial banks, asset owners and insurers gathered here today.

The debate is no longer about whether, it's about when. The Intergovernmental Panel on Climate Change (IPCC) is unequivocal: the climate system is warming, and many of the observed changes are unprecedented. The last thirty years have been the warmest period of the last 1,400 years in the Northern Hemisphere and each of the last three decades has been successively warmer at the Earth's surface than any preceding decade since 1850. There is now a consensus within the scientific community that extreme weather events such as droughts, floods or typhoons, will increase in severity and intensity, striking developing countries particularly hard.

So what does this means concretely for an insurer? Let me start by recalling that insurance stands on two legs: protection - of people, goods and physical assets - on the one side and investments, to enable this protection, on the other. This makes insurance one of the only industries with a role to play in both the adaptation and mitigation aspects of the climate issue.

On the investment side

It is our responsibility, as a long term institutional investor, to consider carbon as a risk and to accompany the global energy transition. The burning of coal to produce energy is today clearly one of the biggest obstacles preventing us from reaching the 2°C target. For this reason, AXA has decided to divest from the companies most exposed to coal-related activities for the assets managed internally. This initiative represents a divestment of EUR 0.5 billion. Divesting from coal contributes both to de-risking our investment portfolios and to building better alignment with AXA's corporate responsibility strategy to build a stronger, safer and more sustainable society.

In addition to this exclusion policy, AXA also has a positive approach. That is why we also commit to tripling our green investment footprint aiming to reach to over EUR 3 billion by 2020 for our General Account, coming principally from investments in clean technology private equity, green infrastructure, impact investment and green bonds.

That being said, the most impactful measure for a company of AXA's size remains the integration of environmental, social and governance (ESG) criteria in our investment decisions. Therefore we have committed to integrating ESG footprint in all relevant asset classes of AXA's General Account by end 2015.

This is also why AXA has signed the "Montreal Pledge" [1] to assess and disclose the carbon intensity of our investments by December 2015. We had been working on refining our carbon footprinting methodology for several months, and this signature makes us the first insurer to take part in this initiative launchedunder the auspices of the UN Principles for Responsible Investment.

On the insurance front

Extreme weather events are increasing in intensity and severity.Last year alone, AXA paid out over EUR 1 billion globally in weather-related insurance claims.Climate risk for us is neither an ideological or theoretical issue: it is a core business issue, as we are already seeing the impact of increasing weather-related disaster risks.

As apprehending the scale of such risks is critical for society, AXA has begun to pro-actively publish for the first time this year the impact of such events on our broader risk management profile [2].

More importantly, understanding these increasing risks comes with a responsibility to help our clients, cities, and communities to better adapt to climate change.We aim to do this by promoting prevention measures and sharing our risk management expertise to inform public policy.

In developed countries, we are increasingly offering extreme weather early warning systems and prevention services to our customers, be they individuals or companies. Within our current strategic plan, Ambition AXA, we have also developed EUR 64 million worth of insurance for renewable energy, thereby contributing to enable this market to develop to its full potential. Finally, we have provided expertise and advice to governments at both the EU and national levels about how to build robust and sustainable natural catastrophe insurance schemes in partnership with the private sector.

In developing countries, which are often the first hit by the consequences of climate change while at the same time being the least insured, the issue is very much about access to insurance.In this context, AXA Corporate Solutions has developed a partnership with the World Bank to expand the availability of innovative climate index (what we call "parametric") insurance solutions. We are expanding our investments and offers related to micro-insurance, and have recently established strategic partnerships with players like Leapfrog and Microinsure.

Through our partnership with CARE we accompany disaster risk reduction and adaptation projects in African, Asian and Latin American countries to help communities to better prepare for climate change and mitigate its impact.

Finally, AXA has joined this month the African Risk Capacity initiative, a regional insurance pooling mechanism whose mission is to help African Union Member States better anticipate extreme weather events and protect the food security of vulnerable populations. Nine countries are expected be covered in 2015, and the aim is to increase this number to over 20 in the next four years.

What next?

Beyond AXA's own commitments, there is a question as to what the role of the broader insurance industry will be in the coming years with respect to climate change. From my perspective, the link between insurance and climate is obvious: both require anticipation and commitments over the longer term.

Insurers are in a uniquely long-term business, with some insurance liabilities that stretch up to thirty years. We know that climate models show the impact of climate risks increasing significantly over this kind of time horizon.

However, as an investor, regulation is pushing us to focus our investment strategy on a shorter term time horizon than what corresponds to our insurance liabilities. Notably, the new IFRS accounting rules and the lack of differential treatment for long-term investments such as infrastructure assets do not encourage the long-term focus that the insurance sector should mechanically have.

This means that while responsible industry players will make commitments this year to contribute to the transition to a low carbon economy, these efforts may not reach the necessary scale. As long as the "systemic risk" of carbon is not correctly embedded into regulatory frameworks, through efficient'carbon pricing' mechanisms and more broadly favorable treatment for longer-term investments that are necessary to limit climate risks, it will always be a story of a few responsible actors doing their best within a broader financial system that is not designed for sustainability.

There are still seven months ahead until COP 21, so today we are calling on policymakers to send the right signals to the market: what we need from the Paris negotiation is to raise the level of ambition of the agreement by setting a clear timeline to peak emissions in the coming years and, more importantly, by defining a pathway towards zero CO2 emissions in the long term. Beyond that, we also need to launch a serious discussion on financial regulation and greater incentives to focus on long term investments.

I know this is possible. As an insurer, I have personally witnessed many times humanity's capacity for resilience. This gives me hope that we will learn from the errors of the past and set ourselves on a path towards a more sustainable future, beginning here today and resulting in a comprehensive, fair and ambitious agreement this December. In any case, we have no choice: a 2°C world might be insurable, a 4°C world certainly would not be.

[1] http://montrealpledge.org/
[2] From an economic capital modeling perspective, climate risks borne by the AXA Group account for 16% of our Property and Casualty risks