Climate change and biodiversity loss: Both fundamental challenges for our time

Climate change

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22-11-2024

OPINION: Arno Ahosniemi, CEO, Finance Finland

Insurance companies, as underwriters and major institutional investors, hold responsibility and power in many areas of sustainable development. Fortunately, behaving responsibly and pursuing profitability objectives are not mutually exclusive. The sector must ambitiously face the global challenges that threaten not only our entire economic system but the very future of humankind.

Climate change and biodiversity loss are two of the biggest concerns of our time. Human activities have increased the amount of atmospheric greenhouse gases and accelerated global warming. We are also to blame for the unprecedented, rapid decline of biodiversity.

Climate change and biodiversity loss hit hard on all industries and functions of society, not least on the insurance sector. The outlook for 2024 looks similarly concerning, with first-half economic losses already above USD 117 billion and insured losses projected to reach at least USD 58 billion as of 31 July. Given the recent devastation from hurricanes in Florida and severe flooding in Central and Eastern Europe and Spain, among others, this year's losses may surpass those of 2023.

Climate change is expected to only increase extreme weather phenomena and related damages. While biodiversity loss is not similarly measurable in insured losses, the value of ecosystem services delivered by biodiversity is worth another estimated USD 125 billion per year. The deterioration of nature represents a critical threat to the performance and sustainability of financial assets and economies.

Climate crisis is a risk ‒ and is also reflected in prices

As a major investor, lender, asset manager and sharer of insurance risks, the entire financial sector plays a key role in fighting climate change and biodiversity loss. Risks of this magnitude must be reflected also in the prices of finance and insurance. This requires understanding and knowledge of the short- and long-term environmental and climate risks of business.

Insurers are the trailblazers of risk management: they are required to assess and react to constantly evolving risks. The sector's exceptional understanding and communication of the risks related to climate change and biodiversity loss make it a reliable and flexible partner in fighting environmental and climate challenges.

Climate change preparedness must be part of the routine

The insurance sector has recognised global warming as a major risk since the 1980s. Climate change calls for risk management and new policies from organisations. It is increasingly important for climate change mitigation and adaptation measures to be a routine part of every company's operations.

Global mitigation of greenhouse gas emissions is one of the key means to reduce climate-related risks. Finance Finland's board ruled in 2017 that the Finnish financial sector endorses the goals of the Paris Climate Agreement to limit global warming. We made a sustainable development commitment setting the sector's climate goals, and together with our member organisations created a reporting framework that companies can use to monitor their own climate work measures while also making them more transparent.

We tracked the climate measures of Finnish financial sector companies over a period of five years. For financial companies, climate action is not just empty words: annual surveys proved that their climate change consideration had increased significantly during the period.

In the last survey in 2022, 100% of the respondent companies said they had integrated climate change considerations into their risk management. In the first survey in 2018, this figure was a mere 61%.

There is still room for improvement. Climate change considerations were included in the strategy of 79% of the companies in 2022. Although this figure had gone up from the 65% five years earlier, there is still much to do to consolidate climate considerations in companies' strategies. Climate change and biodiversity loss stand side-by-side as the most significant forces shaping the operating environment. Without question, such major phenomena must also be acknowledged in business strategies.

Insurance sector drives the economy

The insurance sector has a vital role in both stopping climate change and preserving biodiversity. Although the sector itself is neither a significant polluter nor an authority in environmental and climate policy, it has a crucial role in helping the economy to support sustainable climate and environmental goals.

The insurance sector builds economic resilience against extreme conditions and physical risks by providing risk information, risk pricing expertise, innovative risk transfer products and services, and knowledge of damage prevention. The sector also supports the transition to a carbon-neutral, resource-efficient circular economy through its insurance activities, investment strategies and the active reduction of its own carbon footprint.

It is important to keep in mind that the insurance sector can unlock profitable new business by being a key partner in the new activities surrounding the green transition. For instance, offering insurance solutions to new technologies helps customers progress towards more environmentally friendly operations. Insurers are also among the biggest institutional investors in Europe, which gives them both the responsibility and the opportunity to promote the green transition ‒ through their decisions, they have the power to significantly influence the entire economy and society at large. Hopefully, debating the sustainability of finance and business will soon be a thing of the past, and sustainability will become the new norm in all economic activity.

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