Embedding nature at the very core of what insurers do (II/II)

Nature on corporate boards

“What would Nature ask the business to do?” says economist Kate Raworth. This is precisely what every board must address. ‘Hub Culture’ and ‘Faith in Nature’ - the first of the two companies that indeed welcomed Nature on their boards was part of a personal exploration.

Appalled by what kind of a depleted world we could leave behind, Lord Nicolas Stern and Nobel laureate Joseph Stiglitz assert: “There is no ethical justification for giving so little weight to future generations’ welfare.” Let’s bear in mind this nugget from Richard Feynman: “the imagination of nature will always exceed that of the human animal”. 

Sponge cities  are urban areas designed to cope with excess rainfall using a variety of techniques, championed by China. They have abundant natural areas such as trees, lakes and parks that absorb rain and prevent flooding. Experts say cities need to be designed with this in mind as a growing number of urban areas are experiencing devastating floods due to climate change. 

Biobased construction materials are the key to reducing carbon emissions from the construction sector, which currently contributes 40% to the global emissions. By producing the required biomass locally, one can significantly reduce supply chains and transport energy. 

Investing in bioclimatic design in its public spaces, using compressed soil, permeable pavers and paint to effectively reduce maximum air temperature during heatwaves.

According to a report by UNEP, global terrestrial restoration costs - not including costs of restoring marine ecosystems - are estimated to reach at least $US200 billion per year by 2030. The report emphasised that every $US1 invested in restoration creates up to $US30 in economic benefits. 

Indigenous knowledge in decision-making processes

Given their wealth of knowledge and proven practices, there is an urgent need to engage indigenous peoples as equal partners. It calls for integration of traditional ecological knowledge into natural resource management and the promotion of social and cultural resilience through the preservation and revitalization of traditional practices and beliefs. 

The state of money pipelines

Euro area firms generate an impact equivalent to the loss of 582 million hectares of pristine natural areas worldwide, according to European Central Bank (ECB). Out of them, 398 million hectares are concentrated in Europe. The European economy has a significant biodiversity footprint in all continents. Just ten banks finance around 40% of the global impact on biodiversity. 

When analysing climate and nature risks together, there’s a significant amplification mechanism between (a) drought risk and surface water provision, and between (b) flood risk and the ecosystem services that protect against them.

Nature negative flows

UN Environment Programme analysis of NBS (Nature-based Solutions) finance reveals: “Nature-negative finance flows from public sources were almost USD 1.7 trillion in 2022, which is ten times greater than public finance flows to NBS, estimated at USD 165 billion. 

Nearly 90% of these flows are directed to fossil fuels and agriculture, at 69% and 20%, respectively, according to the report. 

Last year saw a twofold increase in fossil fuel subsidies to consumers, from USD 563 billion in 2021 to USD 1,163 billion in 2022“.

Approximately $500 billion in agricultural subsidies worldwide perpetuate unsustainable food and land use systems, which lead to environmental degradation, poor nutrition and income inequality. If we do nothing about the way we produce and consume our food, it will amount to damage estimated to cost $16 trillion each year by 2050. 

However, by redirecting harmful subsidies toward sustainable practices, including regenerative agriculture, governments can accelerate international climate and biodiversity progress. This shift could provide 40 percent of the funding we need to protect and restore nature - without having to generate new funding streams. We need to see more of these shifts, and we need them urgently, reports Nature.org.

#COP15 resulted in the adoption of the Global Biodiversity Framework (GBF), prompting the world to consider how better to leverage the necessary finance for nature.

Unfortunately, a WWF report published in December 2023, “When Finance Talks Nature,” revealed that even though an increasing number of countries are developing government-led sustainable finance investment frameworks, the majority fail to adequately address nature loss.

The shift to more sustainable capital allocations focusing on the natural environment is possible if financial sector professionals understand why nature is essential and the steps they can take to integrate nature into decision-making.

Can banks and investment managers accelerate the transition to a nature-positive economy?

 The University of Cambridge Centre for Sustainable Finance (CISL) believes they can by engaging with portfolio clients and investee companies on nature protection and restoration through existing climate mitigation efforts. These proposed transitions tend to overlook insurers' potential contribution. Risk management, risk carrying, and investing the float are a powerful trinity.

By integrating the consideration of nature into existing climate engagements, capital can move more quickly towards activities that address climate change and restore and protect nature, preserving financial and natural capital for the long term.

Coastal and oceanic environments are critical

According to the proceedings of the Royal Society their economic value of based on fisheries production, shipping traffic and carbon absorption was recently calculated at US$2.5 trillion each year. The overall value of the ocean is estimated as an asset 10 times this figure. 

Dr. Howard Dryden of GOES Foundation rings an alarm bell: “We know that carbon dioxide and methane are only about 25% of climate change yet the world is fixated with net zero, which will be the death of us all. Even if we achieve net zero by the end of the decade, atmospheric carbon dioxide still passes 500 ppm and oceanic pH drops below pH7.95, and we lose marine life in the oceans, the SML layer, and end up back with catastrophic climate change. Unless we stop marine pollution by 2030. Ocean acidification is the Evil Twin of climate change, Evil because it will be far more serious, the process is half way through and in 20 years there will be no way to stop the process once we pass pH7.95”.

“A rising number of lawsuits in courts around the world are holding governments and corporations to account for their treatment of the seas and those who rely on them”, reports The Guardian. Insurers will sooner than later will get drawn into this net.

The loss of nature presents not only risks but also untapped opportunities for forward-thinking organisations. The Taskforce on Nature-related Financial Disclosures (TNFD) was established to provide better information to allow financial institutions and companies to incorporate nature-related risks and opportunities into their strategic planning, risk management and asset allocation decisions. 

In conclusion

Is a daily explosion of new climate jargon proving too unnerving? Does a plethora of new regulators align or misalign them with nature? For sure, lacking ‘double materiality’ at International Sustainability Standards Board (ISSB) leaves a big void in the International Financial Reporting Standards (IFRS) - thereby there is no onus on insurers for any harm that they may aid or abet. 

Nature is a dependable ally. It has no demands. Mitigation, adaptation and resilience all come along for free. The demise of Net-Zero Insurance Alliance (NZIA) appears to have put to rest any ambitions for ‘decarbonising underwriting’. Nature’s manifestations, some alluded to here, could be carbon free solutions even before they are underwritten. As an indemnity process they could lead to a betterment. However, if we continue to retain our conqueror mindset, expect Mother Nature to continue pushing back increasingly vigourously. If the regulators prefer staying ‘nature agnostic’, the regulated will aid and abet pushing insurance into irrelevance. Fixing protection gaps and under-penetration will remain a mirage. Here is an opportunity to assume stewardship for an existential transition. Should we let this slip out of our grasp?  

To continue plundering Earth’s resources at a pace and scale beyond its ability to replenish them is a recipe for disaster. Not factoring in this externality will eventually catch up. Individual solvency cannot defy ‘Planetary Solvency’. Having said that, the threat to Planetary Solvency is not just an outcome of GHG emissions. What Howard Dryden calls evil twins should not be underestimated.