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Giving coal the cold shoulder

In recent months, some of the biggest insurers in the world have announced their withdrawal of support for the coal industry. Alasdair Smith, member of IFoA’s Resource and Environment Board and general insurance actuary, explores these developments and their implications for actuaries.

Alasdair SmithFor the past two years, India has been my adopted home. It has been a great joy to observe such a fascinating, rich culture, set against the dizzying pace of economic and technological development in the country’s financial capital of Mumbai. However, India’s energy mix is still dominated by coal. It is home to the world’s largest coal company, the state-owned Coal India, and coal is deeply entwined in the country’s political economy. Given India’s reliance on coal, it is unsurprising that Carbon Atlas data for 2017 found India to be the third highest producer of CO2 emissions in the world.

Coal-fired power generation accounted for 75% of India’s total power generation in 2015 and population growth is one of the main drivers of India’s projected greenhouse gas emissions. By 2028, India is projected to overtake China as the largest country in terms of population. Yet, India faces the significant challenge of providing universal access to reliable electricity. According to the IEA’s Energy Access 2017 report, 18% of the population still had no access to electricity in 2017. Population growth, alongside initiatives to provide universal access to electricity means that India is likely to have the fastest-growing electricity market of any of the world’s biggest economies.

In spite of this, under current policies, India will reach 40% non-fossil generation capacity nearly a decade earlier than targeted. However, this Nationally Determined Contribution (NDC) is not in line with the Paris Agreement, because to reach full decarbonisation globally, no new coal plants should be built, and emissions from coal power should be reduced by at least 30% by 2025. Like in the UK, and elsewhere globally, one of the muted solutions is improving the competitiveness of renewables by removing, or redirecting subsidies away from fossil fuels, and even potentially transferring them to renewables.

Recent announcements from the insurance industry may be just what is needed to spur on necessary change. Last month, the major US General Insurer Chubb declared it would start withdrawing its support for the coal industry. Specifically, Chubb announced it will cease to insure companies which own or operate coal fired power stations, as well as companies which generate more than 30% of their revenue from coal mining or from the supply of coal-fired electricity. The insurer will also phase out its investments in such companies over the next three years. When announcing the new policy, Evan Greenberg, CEO of Chubb, stated that "making the transition to a low-carbon economy involves planning and action by policymakers, investors, businesses and citizens alike”.

Chubb’s announcement follows a string of similar announcements to come out of Europe, from some of biggest names in the industry - Allianz, Generali, Axa, Lloyd’s of London and Zurich. It is interesting to compare the detail of Chubb’s announcement with that made by Zurich a week earlier, as they differ in two key areas. Zurich's announcement extends beyond coal, also setting similar insurance coverage and investment criteria for shale oil. Like coal, the extraction and burning of shale oil to produce energy has a number of negative impacts on the environment, including the emission of greenhouse gases, water consumption and pollution, and extensive land use. The other striking difference is that, until 2022, Chubb will consider exceptions to its policy “in regions that do not have practical near-term alternative energy sources”. This subjective criteria has the potential to exempt my current home of India, which has a massive 100 gigawatts of coal-fired generating capacity under development - almost three times the UK’s current total capacity from all energy sources. China has double this.

Overall, however, these developments are a step in the right direction. Climate activist Naomi Klein explains in her book, ‘This Changes Everything’, that if all fossil fuel companies in the world burn their proven reserves, it will be impossible to meet the United Nations’ target of limiting global warming by 2oC above pre-industrial levels. Policies such as the ones discussed above, which encourage a shift away from fossil fuels, are likely to be instrumental in supporting the global transition to a low-carbon economy.

Over 4,400 IFoA members work in General Insurance. Actuaries working for an insurer which has not yet made a similar withdrawal pledge should consider the IFoA’s climate risk alert issued in 2017. The risk alert asks all actuaries to ensure that they understand, and are clear in communicating, the extent to which they have taken account of climate-related risks in their work. In ensuring that the global insurance industry can fulfil its role of providing security against many of the risks posed by climate change, do you have a professional responsibility to recommend that your employer considers following suit? Given actuaries’ unique sense of long-term financial risk and professional obligations, I encourage you to consider your role in advising insurers about the risks relating to climate change and ensuring that the industry really does lead from the front.