Transition and the Race to Zero: The insurers’ role

Chris Hall, Executive Director, Financial Solutions at Willis Towers Watson looks at some of the key questions surrounding the climate transition and how the company is developing initiatives in response
Chris Hall
Chris Hall
Executive Director, Financial Solutions , Willis Towers Watson

Climate, environmental and social sustainability goals are at the forefront of many companies’ thoughts. The Paris Agreement, an international treaty on climate change, was adopted by 196 parties in Paris in 2015, setting out the global framework to avoid climate change by limiting global warming to below 2 degrees Celsius above pre-industrial levels.

Taking this further is the Race to Zero,[1]whereby (at the time of writing), 120 countries, 733 cities and 3,067 business, among others, have committed to achieving net zero carbon emissions by 2050 at the latest.

To achieve the goals of the Paris Agreement, many industries will have to play their part, with insurers taking a leading role.

A transformational role for insurance

Through the insurance industry’s role in supporting banks, corporates, export credit agencies (ECAs) and others through the deployment of contingent capital, insurance can have a transformational impact in supporting the transition to Net Zero. This was reiterated recently by John Neal, CEO of Lloyd’s of London, who reminded the (re)insurance marketplace that they should regard the transition to a sustainable future as an “opportunity and not a threat”.[2]

Energy transition

Fossil fuel use in energy, transport and industry accounts for 85% of the global emissions from business.[3] It is critical that high carbon industries transition at a rate which science indicates is necessary to ensure that the healthy climate trajectory is maintained; to support this, though, organisations will require access to insurance capacity during their transition.

As Mark Carney, UN Special Envoy for Climate Action and Finance and the UK Prime Minister’s Finance Adviser for COP26, has said, “To achieve Net Zero we need a whole economy transition – every company, bank, insurer and investor will have to adjust their business models, develop credible plans for the transition and implement them. As insurers take steps to align their underwriting activities with the transition, companies will increasingly need to display that they have the right plans or risk losing access to insurance.”[4]

In response Willis Towers Watson has recently announced the launch of Climate Transition Pathways (CTP),[5]a new way for financial institutions (FIs) to manage their social responsibility and duties through an independent and recognised accreditation model. FIs can identify the organisations transitioning to a low carbon future and offer a solution to support clients committed to measurable and verifiable change, while managing their own reputation, revenue, and profitability.

The CTP governance committee will include the Climate Bonds Initiative and Volans (which created ‘Bankers for Net Zero’) and will use the Assessment for Low Carbon Transition (ACT) methodology to create a robust accreditation model. This will enable organisations meeting principles aligned to the Paris Agreement to be accredited and thus access insurance capacity and capital to support their orderly transition.

Accreditation will accelerate the creation of an industry standard, support the orderly transition to the low carbon economy, incentivise each company’s transition and monitor annual company performance.[6]

Carney has supported the ethos of CTP stating: “Willis Towers Watson’s work to develop tools to assess companies’ transition plans is a valuable contribution to this process to ensure that every professional financial decision takes climate change into account.”[7]

CTP is now building insurer support with Liberty Specialty Markets (a Berne Union member) becoming the first major insurer to align its capacity.[8]

A changing economic environment in credit and political risk

Over the past 10 years, there has been a significant growth in the number of renewables finance transactions that have been insured in the non-payment insurance (NPI) market. This has followed the trend of increased financing activity in the renewables sector, coupled with the insurers’ own strategy of deliberately supporting ESG linked transactions as they transition away from more pollutive sectors such as oil and gas, coal etc, which previously were seen on a regular basis.

There has also been positive collaboration between the private and public markets whereby private insurers have either sat along ECAs in the same transactions, or in some cases, insurers have supported ECAs on a facultative re-insurance basis. The insurers have provided comprehensive non-payment polices for five years to 15 years or more, complementing the tenor of the underlying obligations.

The NPI market is very well placed to support the trend of renewables deals which we are seeing in the market. As insurers continue to see a new and varied array of deals, their ability to consider new deal types and structures will no doubt only continue to grow, which is positive for both FIs and the overall promotion of renewables transactions.

A recent example of this includes the first Green2Green transaction in Asia Pacific whereby Euler Hermes with Willis Towers Watson supported NORD/LB by insuring a green transaction and investing the premium in certified green bonds, thus supporting new green products and completing the ‘green economic cycle’.[9]

Growing climate change capability

The Willis Towers Watson Climate and Resilience Hub (CRH) is the focal point for our climate expertise and capabilities. It brings together knowledge from our people, risk and capital businesses and from our various strategic collaborations, to deliver climate and resilience solutions in response to regulatory, investor, consumer, employee and operating pressures.

Partnerships (and indeed acquisitions) become ever more important in this field to ensure delivery of innovative solutions. Willis Towers Watson has acquired ‘Acclimatise’, a market leading climate change adaptation advisory and analytics services firm. [10]

Meanwhile Climate QuantifiedTM, brings together deep weather and climate analytical and advisory experience from a variety of fields of expertise.

The future

The virtuous cycle of innovation envisaged by Carney needs governments to set the tone, encouraging companies to implement transition plans, funded through private finance and thus “amplifying the effectiveness of government climate policies and accelerating the transition to net zero.”[11] The same publication suggests that the transition to net zero creates the “greatest commercial opportunity of our age” with recognisable benefits estimated at $26 trillion by 2030.

With its raison d’etre of professional exchange, sharing of expertise and collaboration, the Berne Union is well placed to be at the forefront of this change and as Paul Heaney mused in July, climate could well become the “catalyst of greater multilateral cooperation”[12]

No one institution, working in isolation, can significantly move the needle on climate change, but if all corporates, financial institutions, governments, insurers and investors collaborate together, each moving the needle a tiny amount, we can start to make a difference. At Willis Towers Watson, we are proud to be part of this journey to net zero and look forward to supporting our regulators, investors, clients and employees.

Willis Towers Watson offers insurance-related services through its appropriately licensed and authorised companies in each country in which Willis Towers Watson operates. For further authorisation and regulatory details about our  legal entities operating in your country, please refer to our  website. It is a regulatory requirement for us to consider our local licensing requirements.


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