Media coverage of the G7 Summit last month has been dominated by tax treaties and post-Brexit tensions. Far less attention has been paid to the potentially momentous commitments made on the environment. Together the leaders have agreed to a ‘green revolution’, stepping up their own action on climate change as well as reaffirming $100bn a year to help countries most in need of support to cut emissions. Leaders are keen that this is viewed as a major statement of intent, and a sign that a green and equitable post-pandemic recovery is firmly in their sights.
The Economics of Climate Change, a report by Swiss Re Institute, underlines the need for bold action now if we are to avoid the worst impacts of climate change.
For the first time it quantifies the economic impact of a warmer environment and demonstrates that climate change preparedness relies on working together to mitigate the impact of global warming and limiting further damage to the planet.
A warmer planet affects us all
Climate change impacts all of us. Our analysis shows that by mid-century, the world stands to lose 10% of total economic value because of climate change. Rising global temperatures and more extreme weather events will increasingly set economies back through physical risks such as property damage, disruption to trade and lost productivity.
Naturally, while a greener economy is ultimately in everyone’s benefit, there will be a transition cost to get there as we move away from systems and infrastructure underpinned by fossil fuels and carbon-intensive resources. However, the ecological and economic cost of doing nothing is even higher.
Our report stress-tests how climate risks will impact 48 countries representing 90% of the world economy, and how resilient they are to change. And it is clear that all countries will be affected, but some more than others.
Economies in South Asia are particularly exposed. In the most severe scenario, some countries in southeast Asia could stand to lose 50% of GDP by 2048. Although less exposed, Europe could lose around 8%.
Within Europe, economies like Germany are less exposed than more southerly countries like Italy. Countries in Eastern Europe and Scandinavia are less sensitive directly to rising temperatures, but they too will feel the effects of changing weather patterns with phenomena such as drought, hail and extreme rainfall with flooding impacting their economies. In recent years, such secondary perils have been rising in prevalence. We are all exposed to these risks and they can hit anywhere.
Improving our understanding of these risks relies on better data collection and analysis – something insurers have a role in supporting.
Failure to act has a price
By quantifying the cost of climate change, we hope to make the economic case for action in all countries.
In their communiqué, the G7 group commits to “properly embed climate change and biodiversity loss considerations into economic and financial decision-making”. It voices support for mandatory climate-related financial disclosures. And agrees on the need for global sustainability reporting.
And while many countries and companies already have net-zero targets in place, progress has been too slow. Climate change mitigation strategies should not be viewed as optional – nor should time and money spent be seen as a cost. It is an investment in the future. For example, the International Energy Agency estimates that roughly 9 million jobs a year will be created or saved if we were to commit a global annual investment of $1tn to the green economy between now and 2023. That's only about 0.7% of current global GDP and it would also add 1.1 percentage points to economic growth, essentially paying for itself. Similarly, several studies suggest that the impact on consumer prices should be negligible.
The role for insurers
That said, the transition to a lower-carbon economy presents its own risks related to the transition. Here insurers must play their part by providing the necessary insights and analysis that may help mitigate the impact of this transition. By sharing risk intelligence, they can influence and inform decisions and help create more resilient infrastructure. Underwriting decisions that support the green economy and help insurers and insureds to navigate away from carbon economies over time will also be crucial in reaching end-to-end net zero throughout the entire value chain.
The industry must also take steps to support long-term, responsible investment, as well as risk transfer to help in the transition to a lower carbon economy. This will also enable the technologies needed for a green economy to flourish.
We must capitalise on the momentum we are now gathering by injecting even more energy into addressing the systemic risk that climate change presents.
COP26 later this year represents another significant milestone in the climate struggle and a tremendous opportunity to accelerate progress among a much broader group of countries. After all, climate change will affect all of us, and the solutions must be inclusive.
Reaching the goals of a zero-carbon economy needs all stakeholders – (re)insurers, along with governments, businesses and society - to step up and take part in long-term planning and action. Together, we will work on mitigating the effects of living in a warmer world, supporting nascent technologies, and driving forward net-zero initiatives for the benefit of us all.
