Chapter 2. The Evolution of ESG – PART I
Introductory articles on emerging exposures, risk mitigation and
insurance risk transfer for clients of Omnisure.
A compendium of introductory ESG articles on emerging exposures, risk mitigation and insurance risk
transfer for clients of Omnisure with claims examples.
Martin Birch – March 2022
Chapter 2. The Evolution of ESG – PART I.
The current reality – United Nations Framework Convention on Climate Change (UNFCCC).
The United Nations Framework Convention on Climate Change (UNFCCC) established an international environmental treaty to combat “dangerous human interference with the climate system”, in part by stabilizing greenhouse gas concentrations in the atmosphere. It was signed by 154 states at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in Rio de Janeiro from 3 to 14 June 1992.
It established a Secretariat headquartered in Bonn and came into force on 21 March 1994. The treaty called for ongoing scientific research and regular meetings, negotiations, and future policy agreements designed to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.1
Regardless of your views on climate change, this is the background to a groundswell movement that is already changing the way business is being conducted around much of the world. This, quite simply, IS current commercial reality. The Kyoto Protocol, which was signed in 1997 and ran from 2005 to 2020, was the first implementation of measures under the UNFCCC. The Kyoto Protocol was superseded by the Paris Agreement, which came into force in 2016. By 2020 the UNFCCC had 197 states parties. Its supreme decision-making body, the Conference of the Parties (COP), meets annually to assess progress in dealing with climate change.
The Paris Agreement is an international treaty which was the product of negotiations at COP21 held in Paris in 2015. In addition to the 1.5 degree Celsius target, the Paris Agreement contains a series of strategies for reducing and limiting the impacts of climate change including the Nationally Determined Contributions (NDCs), provision for possible emissions trading mechanisms, as well as financing for transition in developing nations. The treaty established different responsibilities for three categories of signatory states. They are:
- developed countries,
- developed countries with special financial responsibilities, and
- developing countries.
The developed countries (also called Annex 1 countries) originally consisted of 38 states, 13 of which were Eastern European states in transition to democracy and market economies, and the European Union. All belong to the Organisation for Economic Co-operation and Development (OECD). Annex 1 countries are called upon to adopt national policies and take corresponding measures on the mitigation of climate change by limiting their anthropogenic emissions of greenhouse gases as well as to report on steps adopted with the aim of returning individually or jointly to their 1990 emissions levels.
The developed countries with special financial responsibilities (also called Annex II countries) include all of the Annex I countries with the exception of those in transition to democracy and market economies. Annex II countries are called upon to provide new and additional financial resources to meet the costs incurred by developing countries in complying with their obligation to produce national inventories of their emissions by sources and their removals by sinks for all greenhouse gases not controlled by the Montreal Protocol.
The developing countries are then required to submit their inventories to the UNFCCC Secretariat. Because key signatory states are not adhering to their individual commitments, the UNFCCC has been criticized as being unsuccessful in reducing the emission of carbon dioxide since its adoption.
The Glasgow COP26 convention for the UN Climate Change Conference renewed focus on the future. Climate change is gaining more urgent attention. As the impacts, causes and solutions are grappled with more frequently and with more purpose, climate change has come into sharp focus featuring prominently in newsrooms, courtrooms and boardrooms.
What is the importance for Insurance
ESG considerations are very significant for Insurance companies. This is because they need to consider both the asset and liability side of their balance sheet in their role as:
- managers of risk, as well as
- investors in large asset portfolios
If you don’t fully appreciate what this means, read our Foundation Document. In there, you’ll read and comprehend the impact of the following statement by the Board of largest non-government owned Reinsurance company in the world, Munich Re “Munich Re will no longer insure any new constructions of coal-fired power plants or coal mines as single risks in developed countries or in the majority of emerging markets” (their financial Liabilities). It also means “Munich re will not to invest in companies that generate more than 30% of their revenues from coal extraction or coal-fired power generation” (their financial Assets).
It is not just the impact of the physical risk that is the issue. “The Paris Agreement has turned climate change into an economic transition risk. It is a pure financial risk as well as a physical risk.” says Sarah Barker, Special Counsel at Minter Ellison Lawyers. “The Agreement targets a global economy that is net zero greenhouse gas emissions by 2050. This is the basis for the change to the global economy over the next 30 years”.2
Our Foundation Document
Refer to the Omnisure website to access the full copy of Omnisure’s publication called “ESG Discussions” being the Foundation Document 3 which contains 13 chapters.
The driving force the compilation of our Foundation Document in the prevailing ESG risk landscape, (March 2022) was the final Chapter 13 with information on insurance and risk transfer for Agricultural Impact Investment Managers and Asset Managers.
1 https://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change. Accessed 22 Dec 2021.
2 A world of Insight: Integrating ESG in the insurance industry – two sides of the ESG coin. Pg 2. June 2018.
3 Our Foundation Document is the original full text version of “ESG Discussions – Introductory articles on emerging exposures, risk mitigation & insurance risk transfer” compiled by Martin Birch. Register on Omnisure Insurance Brokers website for a full copy.
Please contact Martin Birch for a copy of the full-text Foundation Document at martin.birch@omnisure.com.au
