„Insurers are natural partners for the green transformation of the economy“

Germany’s Supreme Court, the Federal Constitutional Court, has decided that the Federal Climate Change Act falls short. So, the justices in Karlsruhe gave the Federal Government until the end of next year to come up with more specific greenhouse gas reduction targets for the period after 2030.

That is a ground-breaking judgment for more climate protection, because if we really want to mitigate the impact of climate change, we need to do more. It is a good thing the justices in Karlsruhe make the government set clear emissions targets for the period after 2030, because it allows the business community to plan ahead for the long term. We as insurers depend on such targets, too: The insurance business model has always been based on long-term protection against risks – and sustainability is a key requirement here.

The wheels have already been set in motion: At the end of February, the Sustainable Finance Committee has submitted its proposal for more sustainability in the financial sector, providing a first suggestion on how to navigate this complex issue.

The government’s Sustainable Finance Strategy decided last week is an important step towards a sustainable financial system. What’s particularly positive about it is the plan to issue more green bonds in future. Insurers can only sell green financial products if there are enough green assets to buy.

But the government is not the only one who needs to step up. “All the players in the financial system have to ask themselves if the sustainability risks have been identified and if the opportunities presented by the transformation are being seized”, said Jörg Kukies, State Secretary at the Federal Ministry of Finance. And he is right.

We want to contribute to the Green Deal and help Europe become climate-neutral.

That’s why insurers support the Sustainable Development Goals (SDGs) of the United Nations and the goals of the Paris Agreement. We want to contribute to the Green Deal and help Europe become climate-neutral. Our position is clear:

1. By 2025, insurers want to operate climate-neutrally – at least at their German locations.
2. By 2050, insurers want to reach carbon neutrality in their investments; the first carbon reductions are to be realised in investment portfolios by 2025, and the portfolios’ carbon footprint is to be further reduced from then on.
3. Eventually, insurers will not underwrite any commercial or industrial risks, if clients and business partners won’t work towards a sustainable economy. The insurance industry believes in active engagement with clients and government to support a quick transformation.

It is much more than just lip service. Insurers put their money where their mouth is when it comes to the green transformation of the economy. The German Insurance Association (GDV) is Europe’s first insurance association to join the global Net-Zero Asset Owner Alliance, a network of the world’s biggest institutional investors striving to bring down their investment portfolios’ carbon footprint to net-zero by mid-century.

Insurers are doing their part – but they depend on consistent political support. Government acts in a sustainable way when policies are consistent with the principles of the market economy and provide guardrails for the players who support the green transformation.

What does that mean?

It means, for example, that market mechanisms have to be true to the polluter-pays principle. So, the harmful emission of carbon dioxide must be included in the price of goods and services.

It also means that investment decisions made by insurers will be based even more on sustainability criteria in future, while being compliant with the Act on the Supervision of Insurance Undertakings and Solvency II at the same time.

In other words, sustainability rules must be risk-appropriate – and sustainability has many facets. There is no one-size-fits-all solution, this is true for the insurance sector as well. Small and large insurers, full-service, niche and single-line insurers are all confronted with different sustainability challenges. Therefore, both regulation requirements and supervision practices should reflect these differences.

Insurance companies want to make their investments more sustainable. But in order to do so, they need a much bigger universe of sustainable assets to buy. Only 4% of the overall yearly bond issuance are green bonds. In addition, there need to be more investment opportunities in the realm of green infrastructure projects, to bring down carbon emissions more quickly.

Sustainable investments need transparency: Companies that want to act sustainably and in a carbon-neutral way, need comprehensive, reliable and at the same time easy-to-use information. With these requirements in mind, the European Union created an ambitious classification system: the EU taxonomy for sustainable activities. Investors will only be able to work with this information, though, if the data is provided in a clear and standardized format through a freely accessible database.

Time is short, because climate change is well underway. Insurers are natural partners for the green transformation of the economy and for a sustainable infrastructure. They will shape and support the sustainable investment debate – and the insurance sector itself will become more and more sustainable, too.

The original article was published in „Versicherungswirtschaft heute“ on May 6, 2021.