Climate Change at the crossroads

Companies: IPCC, AXA IM

People: Matt Christensen

Partnered Content

The escalating threat of climate change means business leaders and policy makers rapidly need to take collective action.

The contribution that corporations, and indeed the world at large, need to make to mitigate climate risk was brought sharply into focus recently.

At last December's United Nation's COP 24 Climate Conference in Poland, delegates were warned that the planet has reached a tipping point, as greenhouse gas emissions were once again on the rise, for the first time in four years.

The UN's 2018 Emissions Gap Report revealed that global CO2 emissions from industry and energy production went up by 1.2% in 2017, largely because of economic growth. But equally it seems that national efforts to cut carbon emissions have stalled.

Matt Christensen, Global Head of Responsible Investment, AXA IMThe Intergovernmental Panel on Climate Change (IPCC) report highlighted that to avoid irreversible and catastrophic damage to the planet, global temperatures must not go up by more than 1.5°C. And according to the UN, to keep the world below that threshold, global greenhouse gas emissions must be 55% lower than they are today, by 2030.

But while COP 24, delivered some results, there was also disappointment. While delegates did sign an historic agreement on the Paris Climate Agreement rulebook, the event was marred by a lack of a political declaration on the urgent need to scale up countries' emission reduction commitments.

Large emitting countries such as the US, Saudi Arabia and Russia rejected calls from the majority to welcome the findings of the IPCC's report.

 

Tackling the threat

AXA IM Global Head of Responsible Investment, Matt Christensen, believes that the international business community and especially the insurance industry, can take a leading role in encouraging moves towards a more sustainable global economy.

He explains: "The insurance industry is uniquely well placed to influence and give momentum to sustainability efforts. And that applies to participants across all lines of business.

"It should include all key functions in an insurance company, from risk management and underwriting, through sales and marketing – and especially investing."

Christensen, who directs the development of AXA IM's responsible and impact investment programme, is also tasked with integrating Environmental, Social and Governance (ESG) criteria across the firm's €740bn of assets under management1.

His role includes developing innovative solutions that help AXA IM's insurance clients invest sustainably while meeting their financial, accounting and regulatory needs.

Christensen says: "Of course insurers have a vested interest in future proofing their business models against catastrophic climate change, but they can drive positive changes for society in other ways too, via accountability and transparency, for example."

 

Leading the way

Christensen believes that together insurers and investment managers can make a big difference to climate risk, pointing to guidance put in place by the UN, as a starting point.

The cornerstone framework for the insurance sector consists of the UN Environment's Finance Initiative Principles for Sustainable Insurance (the PSI Initiative). Its aim is to prevent and reduce ESG risks, and better manage opportunities, to provide quality and reliable risk protection.

Co-founded by 27 organisations in 2012, it now has around 100 members worldwide, including insurers, representing around 20% of global premium volume, and US$14 trillion in assets under management.

Members, like AXA, of the PSI's new Climate Ambition Coalition, which starts this year, have further committed to taking action on decarbonisation and climate resilience in their insurance and investment activities.

Christensen believes there's plenty of scope for insurers of all sizes to start making a bigger difference through smarter investment decisions, with help from their investment advisors.

 

From ESG to Impact

AXA IM is a leader in the ethical and sustainable investment domain, launching a fund in France in 1998, which integrated specific screening criteria.

"Today, ESG criteria are progressively being integrated into our investments irrespective of the asset class - across equities, bonds, high-yield, property, alternatives and so on," Christensen says. "As a responsible investment leader and as an investment manager with insurance heritage we're uniquely positioned to advise clients."

"Being an early starter in sustainable insurance investing, we have developed the resources to help clients drive change through their investments. Not only that, we're firm believers that ESG analysis can offer improved risk-adjusted investment returns, that are greater over the long term."

Christensen, who is in dialogue with AXA IM clients around the world, finds the pace at which responsible investing is developing varies across the global insurance markets.

He notes that while some insurers are just starting out, others are beginning to align their investments with core values and business lines, for example in divesting fossil fuels. A number of insurers are going further still, moving beyond ESG integration risk management onto impact investing opportunities.

Christensen says: "Impact investing solutions focus on financing innovative businesses and projects that are designed to have intentional, positive, measurable and sustainable impacts on society and the environment, while simultaneously delivering financial market returns.

"As an active practitioner in impact investing since 2013, we have seen substantial market growth over the past five years - in both public and private markets - creating a deeper and broader opportunity set."

"The environmental and societal challenges the world faces today are of a scale that requires ambitious collective action and we believe this rapid expansion and development is set to continue and indeed accelerate in 2019 and beyond."

 

Bonds go green

Green bonds are just one such growth area aiming to tackle climate risks.

Established in 2007, green bonds were developed to raise finance for climate change solutions. Over the past few years, rising awareness of climate change and the need to transition to a low-carbon economy has driven both bond issuers and investors alike towards the asset class.

The overall investment universe now stands at some US$235bn2, having grown from a relatively small US$36bn in 2015.

As the overall market has expanded, so too has the diversity of issuers, regions and sectors available to investors. Many sovereign issuers have emerged over the past year, with France and Poland opening the way in 2017, and subsequently Belgium and Indonesia in 2018.

Green bond issuers are expected to clearly identify the projects that they will finance upfront and provide reports that monitor each projects' environmental benefit. This transparency of proceeds is a key feature of green bonds as it enables investors to assess the positive impact of their investment and to measure their performance beyond just financial returns.

 

Harnessing technology

Investing directly in technological solutions to climate change, such as renewable energy projects, energy efficiency and storage, as well as the wider infrastructure and services that support them, is another route being explored by some insurers.

Christensen's conversations with insurance carriers worldwide have started to take on a new urgency, in response to the human and economic toll of recent natural catastrophes - from historic wildfires in California to flooding across Asia, because of typhoons in the region.

"Taking a lead role in mitigating climate change is no longer a 'feel good' issue for insurers - it's a social issue and it's a business issue," Christensen stresses. "The insurance industry has the resources and expertise to make a real difference and I'm proud to be a part of it at such a time as this."

Footnotes

  1. As at 30 September 2018
  2. Merrill Lynch Green Bonds Index as at 30 November 2018

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