FIS Blog

Why insurers must take “collective action” for our oceans

Martin Sarjeant, SVP, Product Management, Insurance, FIS

June 07, 2022

Oceans play a central role in regulating the climate. But on an increasingly fragile planet, climate change is causing sea levels to rise and are now threatening many people’s way of life.

So, with its theme of “Revitalization: Collective Action for the Ocean,” this year’s United Nations World Oceans Day on June 8 is a timely reminder of the environmental damage we are doing to our seas – and the importance of working together to restore their natural state.

As one of the world’s largest groups of institutional investors, how can insurance companies collectively help minimize further harm to oceans and the significant knock-on effects?

Oceans under pressure

Climate change continues to raise the earth’s temperature, and the oceans are suffering deeply. With their waters warming and expanding, sea levels could rise by more than a meter over the next century.

Large pieces of the Arctic have already disappeared, and climate change could ultimately redraw the world map for our children and future generations. A more immediate effect of the warming oceans is the higher instance of intense storms, hail and flooding that wreak havoc on lives and push up insurance claims and therefore premiums.

Climate change is now well understood, and companies must increasingly disclose their strategies for keeping it in check and report on associated governance, risks and opportunities. But on top of global warming, another environmental disaster is happening to our oceans in the shape of plastic pollution. There are now around 50 to 75 trillion items of plastic in the sea, weighing in at a colossal 363 billion pounds.

As well as choking the life out of the marine ecosystem and causing a loss of biodiversity, plastic pollution weakens the ability of oceans to absorb harmful CO2 and limit the greenhouse gas’s significant contribution to global warming.

Speaking at the Ocean Plastics Leadership Network, Ambassador Peter Thomson, the United Nations Secretary General’s Special Envoy for the Ocean, said:

“We have been eating too long on the lotus if we imagine we can continue current practices of using and disposing plastic without dire consequence. We currently dump 11 million metric tons of plastic into the ocean each year, and this figure is projected to double by 2030 and nearly triple by 2040. We have unleashed a plastic plague upon the planet. Plastic has entered the marine food chain from zooplankton up to the end consumer of seafood – namely homo sapiens. We are consuming it, and scientists are now finding evidence that nano-plastics are crossing our blood-brain and placental barriers.”

Something’s got to give. A lot of change can come from consumers as they both make better choices and put pressure on manufacturers to consider a circular economy for plastics. Many companies are disclosing their progress toward 100% reusable, recycled or compostable plastic through the Ellen MacArthur Foundation in collaboration with the UN.

But it’s also up to influential industries like insurance to drive change. With insurance being so essential to business operations, this change can result from underwriting decisions as well as the investments insurers make.

Driven by the Taskforce on Climate-related Financial Disclosures, the Taskforce on Nature-related Financial Disclosures, the US Securities and Exchange Commission (SEC), the National Association of Insurance Commissioners (NAIC) and the International Sustainability Standards Board (ISSB), more transparent and consistent reporting will help insurers make more informed choices. The same goes for wider and more consistent use of ESG ratings, which will also enable firms to drill down into specific areas of climate and nature-related activity.

Insurers on a mission

With nearly $40.3 trillion (£30.8 trillion) in assets, insurance companies have a massive responsibility to divert more of their investments into sustainable assets and effect change in the companies they invest in. They also have a duty to policyholders, who should be able to understand what type of companies their money is invested in.

But insurers can also exert their influence by deciding who they insure. To date, more than 140 insurers have signed up to the Principles of Sustainable Insurance initiative. All are committed to a strategic approach, which means carrying out every activity in the insurance value chain in a responsible, forward-looking manner while keeping environmental, social and governance (ESG) considerations top of mind.

As both investors and insurance providers, insurers can help tackle the environmental problems that face our oceans in the following ways:

1. Reduce transition risk

As the world moves to a more sustainable economy, insurers face very real transition risks if they continue to invest in companies that produce or rely heavily on single-use plastics, are carbon intensive or play any part in irreversibly damaging our planet.

With consumers becoming far more aware of the dangers and some countries banning these ocean pollutants entirely, it’s never been more urgent to clean up your portfolio and stop investing in single-use plastic producers. Plastic pollution should also be factored into insurers’ own ESG frameworks while firms also reduce holdings in carbon-intensive industries.

Underwriting portfolios contain transition risks, too. By choosing not to insure industries that contribute to climate change or harm nature and biodiversity, businesses can mitigate the effects of tighter environmental controls on tomorrow’s income.

2. Address the physical risks of pollution

Tackling both plastic pollution and fossil fuel exposure throughout your organisation will give you a frontline role in fighting climate change and reducing its catastrophic impacts.

In 2021, natural catastrophes caused an estimated $105bn insured losses globally. With ocean levels rising, coastal flooding will only increase while plastic pollution threatens the health of humans, pets and marine life, damages marine vessels and biodiversity, and has a harmful economic impact on the fishing industry and many other business incomes.

Everything that insurers do to limit plastic pollution and climate change will likely help reduce the frequency and severity of future claims. Their efforts can also show the industry as the force for good that it was always set up to be – supporting policyholders and beneficiaries through their times of need.

For many of us, it may be difficult to think past the next 12 months. But climate change and damage to the oceans is happening every day and there will be “tipping points” in terms of the climate and our oceans that cause significant physical damage in years to come. For example, a 10cm rise in sea level will increase flooding events in Europe by approximately 300%. A 20cm sea level rise will therefore increase flooding events by around 900%.

If, as the UN’s Peter Thomson pointed out, the amount of plastic we dump into the ocean each year is set to double by 2030 and triple by 2040, something needs to be done in 2022 to reverse this trend and set us on the right path.

What future mortality and morbidity risks may insurers be exposed to from the changing climate and increased ingestion of plastics through the food chain? Only time will tell, but one thing is for sure – none of this will be beneficial to our health and quality of life.

3. Achieve and drive regulatory change

Along with increased litigation against polluters or those who fly-tip in the ocean, regulators such as the SEC and the ISSB are moving toward adoption of mandatory climate disclosures and quantification and management of climate risks. Inherent risks that are off the balance sheet today will quickly come to the surface, making it critical to go beyond merely ticking the box of compliance.

But do these regulations go far enough? The Taskforce on Nature-related Financial Disclosures may be in the shadow of the better known Taskforce on Climate-related Financial Disclosures, but it’s clear firms need to think more broadly about sustainability and consider both climate and nature risks.

Government policy is likely to be – or certainly can be – the single biggest driver of change. By getting behind the commitments that world leaders made at COP26, insurers can play a more proactive part in tackling ESG issues.

Challenges and opportunities

The environmental challenges ahead are huge, but they also give the insurance industry opportunities to raise its profile and lead by example.

The results of making changes will also cascade through all the corporations that insurers interact with, for a second wave of positive impacts on the sea, the land, our health and the biodiversity of the planet we live on.