Towards COP26-How the private sector can support investing in climate change adaptation and disaster
How the private sector can support investing in climate change adaptation and disaster risk reduction
A leadership article by Michael Szönyij, Zurich Insurance Group
In 2009, wealthy countries committed to mobilize USD 100 bn (at COP15, referred to as UNFCCC 2009) in annual climate finance to assist low-income countries to address climate change by 2020, and to balance this finance evenly between climate change mitigation (CCM) and climate change adaptation (CCA). With 1.1°C warming already locked into the system (IPCC, 2019) and the ambition to limit global warming to 1.5°C to avoid catastrophic consequences, our global actions on CCM need to be scaled massively to stay within this narrow remaining temperature band. Investing in this transition to a low carbon world is urgently required. It is good to see increasing commitments to net zero, including from private sector, but this needs to be followed by more action, actual funding flows and decisive high-impact spending. Overall there is an increasing urgency to invest adequately in CCM to reduce the expected frequency and severity of the events themselves. Current trajectories put us more towards a 3°C or even 4°C future (UN Emissions Gap report 2019) than the desired below 1.5°C future.
We see the same delayed action with adaptation – there is reluctance to invest in CCA to reduce or avoid the cost of disaster events upfront – there seems to be almost a desire to wait for disasters to unfold and then clean up after them. Failure to invest in disaster risk reduction can only mean one thing: The efforts to invest in CCA will need to be increased even further to deal with the ever increasing consequences. The bill is quite unbearable if we don’t invest early, both in economic but also in humanitarian terms: The Red Cross estimates that by the year 2050, 200 million more people will be affected by weather-related situations they cannot cope with and will need humanitarian assistance (IFRC, 2019).
Our latest research from the Zurich Flood Resilience Alliance*on the status of climate finance shows unfortunately:
The fraction of development assistance helping communities adapt to climate change is highly inadequate.
We also find from our research there is a big need to strongly tackle two urgent problems that need solving, as finance is not targeted to where it is needed most:
Those countries that are the most vulnerable to climate change are not prioritized in receiving funding for CCA, like Somalia, Niger, the Solomon Islands or Chad.
And those populations most affected by the consequences and least able to cope with them, the poorest and the most vulnerable groups, often living in the most hazardous places, are not receiving their fair share of the funding, either.
From a private sector perspective, investing in adaptation - including in the most climate vulnerable countries, continues to look unattractive and is considered too risky. Identifying how to address these risks and directly invest in climate-smart and risk-informed infrastructure and supply chains must become more of a core business practice. The Coalition for Climate Resilient Investment (CCRI), which Zurich Insurance Group has joined, is an important step in the right direction. Global capital markets should also be part of the solution, where the focus so far has mostly been on mitigation and where more long-term investment vehicles for adaptation and resilience building are still lacking. Innovative, blended-finance solutions are piecemeal and their setup costs high. More willingness to design and implement longer-term resilience bonds and more ability to take the upfront risks are urgently necessary, as is a consistent process for resilient reinstatement / so-called “build back better” or build forward to future climates.
I also want to share some specific ideas for the insurance sector, where the focus often is on closing the protection gap between insured and total economic losses by increasing the number of insurance products and their sales. At Zurich, we know the impact that flooding causes. We also know that prevention is cost-effective and that every USD 1 invested in prevention saves on average USD 5 in future losses. Still, nearly 87 percent of disaster-related aid spending goes towards emergency response, reconstruction and rehabilitation, while only 13 percent toward reducing and managing risks before they became disasters. This is why we focus our work with the Zurich Flood Resilience Alliance on communities most vulnerable to climate change effects such as flooding, and to squarely work on the full disaster risk management approach rather than on response and recovery alone.
While risk transfer is an important part of the equation and has consistently shown to increase recovery speed and completeness compared to those not insured, a risk transferred is not yet a risk reduced or eliminated. Research also shows that many insurance products are not specifically designed to be pro-poor and do not reach those that suffer the most from the consequences of extreme weather events.
What can the insurance industry do?
Support society in becoming more risk aware through sharing loss experience, provide advice on how to manage and reduce risk through core insurance functions such as Risk Engineering, and partnering with the humanitarian and public sector to actively work on risk reduction like the Zurich Flood Resilience Alliance .
Take action on risk reduction - before transferring residual risk, there is often a lot that can be done to actively reduce or eliminate risk often at little or no additional cost if properly planned early. Beyond price signals that lower risk is less costly to insure, insurance companies can support and incentivize risk-averse behavior.
Close the protection gap not just from the lower end - increase insurance - but from the top end as well: Reduce total risk and hence total cost of risk. This also includes promotion and acknowledgment of innovative approaches for risk reduction, such as nature-based solutions. In underwriting and risk assessment procedures, account for green and blue approaches’ positive effect on risk quality, beyond physical infrastructure.
Reassess the way cost/benefit-calculations are carried out for grey and green projects and more realistically assess negative consequences of traditional protective infrastructure by putting a value on ecosystems and quality of life.
Understand that language matters: Stop using the term ‘Natural disasters’ and “natural catastrophes”! The No Natural Disasters campaign has been running quite successfully, also with the support of the United Nations Office for Disaster Risk Reduction (UNDRR), but core insurance functions such as Underwriting (for example when discussing perils coverage) or Catastrophe Modeling (when calculating disaster risk or communicating large loss events) seem to be not included in the dialogue. We can change that, integrate the insurance industry into the campaign, and eliminate this unhelpful terminology.
If we take the above steps and understand that disasters are not natural but self-inflicted consequences of natural events, then we can successfully increase the motivation to protect ourselves better – that everyone can do something to be more resilient in the future. Tomorrow’s risk levels are based on today’s determination to avoid the creation of new risk and therefore the investment and risk reduction decisions made today will determine whether we achieve our mitigation and adaptation targets.
This blog reflects the personal view of the author and not necessarily that of Zurich Insurance Group.
Zurich Insurance Group is supporting and participating at the World Climate Summit 2021, an official side event of COP26 and leading forum for business and investment-driven solutions to climate change.
* The Zurich Flood Resilience Alliance («Alliance”) is a multi-sectoral partnership between the humanitarian sector, academia and Zurich’s risk experts, focusing on finding practical ways to help communities in developed and developing countries strengthen their resilience to flood risk. In 2013, Zurich Insurance Group with funding from the Z Zurich Foundation created this Alliance with a focus on shifting from the traditional emphasis on post-event recovery to pre-event resilience building. A second phase was approved and started in 2018 and recently extended to run in more countries and until the end of 2024. The Alliance aims to increase the investment going into pre-event resilience building by USD 1 billion and has committed to scaling up its work in climate action, to help make 2 million people more resilient to flooding.