Insurance Council of Australia, Boston Consulting Group Issue Report Entitled 'Climate Change Roadmap Towards a Net-Zero and Resilient Future'

WASHINGTON, Dec. 28 (TNSrep) -- The Insurance Council of Australia and Boston Consulting Group issued a 50-page report in October 2022 entitled "Climate Change Roadmap Towards a Net-Zero and Resilient Future."

Here are excerpts:

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Contents

4 ... Message from the ICA President

5 ... Message from the CEO

6 ... Introduction

14 ... Pillar 1: The insurance industry's net-zero commitment

20 ... Pillar 2: Net-zero industry operations

28 ... Pillar 3: Net-zero with insurers' customers

36 ... Pillar 4: Net-zero investments

42 ... Pillar 5: Creating a more resilient Australia

48 ... Glossary of terms

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Message from the ICA President

There is no doubt that these past few years have been extremely challenging for people, businesses and communities who have faced multiple severe weather events on top of a global pandemic.

Insurers are the nation's economic shock absorbers. Our role as an industry is to insulate Australians from the financial impacts of loss and damage, including protecting people from the impacts of extreme weather through the recovery and rebuilding of communities to make them stronger into the future.

This gives us a deep understanding of growing climate risk and the measures needed to improve Australia's resilience.

The Insurance Council of Australia supports strong action on climate change, including working with our industry to achieve net-zero emissions no later than 2050.

Supporting a net-zero transition will help to ensure insurance remains affordable and accessible for all Australians.

The Climate Change Roadmap, Towards A Net-Zero Future reinforces the work insurers and reinsurers are already doing to tackle emissions and lays out what we believe is the most efficient way for each insurer to continue to deliver on climate action, in line with steps being taken around the world.

As major investors, insurers can steer substantial amounts of capital into transition-related assets and technologies, factor climate risk into underwriting decisions, and engage with businesses to reduce emissions across insurers' extensive supply chains.

To achieve the climate change goals set out in international agreements to which Australia is a signatory, urgent and significant reductions in emissions are required across all sectors of the economy, and this includes insurance.

The Insurance Council looks forward to working with the wider financial services sector and business community, as well as policymakers and civil society, to drive innovative solutions and advocate for policies to keep the 1.5-C warming limit within reach and ensure insurance remains accessible for all.

Nick Hawkins, President

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Message from the CEO

The effects of climate change are unmistakable and can no longer be ignored. Persistently warming temperatures are leading to more severe weather events, devastating communities and compounding existing vulnerabilities. The societal impacts are being felt in every corner of world, and the cost of extreme weather events will be unlike anything we have experienced. According to work undertaken for the Insurance Council by the McKell Institute, here in Australia the costs of extreme weather events are expected to reach $35.24 billion a year by 2050.

Australia's general insurers are already contributing to the transition to a low-carbon economy. Increasingly, insurers are factoring climate risk into their underwriting decisions and are prioritising investment strategies that capitalise on Australia's clean energy transition.

There have been passionate calls for all sectors of the economy, including insurers, to step up efforts to tackle climate change, and that is precisely the aim of the Insurance Council's Climate Change Roadmap.

This Roadmap provides a best practice pathway for each insurer so the industry can leverage its foundational place in the Australian economy to accelerate our transition to net-zero.

The Roadmap sets out recommendations on how individual insurers can achieve net-zero emissions no later than 2050, with a focus on substantially cutting emissions this decade and playing our part in limiting global warming to 1.5 C.

From setting a shadow carbon price to ensure investment portfolios align with the economic transition already underway, to building electric vehicle charging infrastructure and underwriting the clean energy technology of the future, individual insurers are already innovating to reduce emissions across their operations, investments, underwriting and supply chain.

Australia's transition to net-zero will open new markets and present considerable opportunities for insurers.

In markets like the United Kingdom, with well-defined net-zero pathways, it is estimated that up to 70 per cent of all underwriting will support transition-related assets and technologies by 2050.

Underwriting opportunities will shift considerably in Australia too, where we are expected to require approximately $2.5 trillion of investment in transition activities over the next three decades.

Reinsurers, investors, regulators and customers are also increasingly expecting insurers to play a role in the transition to net-zero, to improve transparency around insurance-associated emissions and demonstrate insurers understand and are managing climate risk.

This action will need to be matched by governments, including through setting strong national emissions reduction targets and implementing a comprehensive set of policies to decarbonise key sectors.

By using this Roadmap insurers can play their uniquely important role in limiting the consequences of climate change, at the same time reaping the rewards of the massive economic shift that's taking place right now and that will only grow in coming decades.

Andrew Hall, CEO and Executive Director

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Introduction

* The need for action on climate today

Climate change will transform the Australian way of life. Having already reached a mean temperature rise of 1.44 C,/1 Australia is on the frontline of climate change impacts, experiencing more severe bushfires, hotter and longer heatwaves, rising sea levels that are exacerbating hazards along our coastlines, cyclones that are projected to intensify and possibly track further southwards, and an increase in rainfall intensity and associated flooding as the climate warms.

The total societal cost of these extreme weather events will be unlike anything Australians have experienced, as climate-related extreme weather events are expected to cost Australia $35.24 billion a year by 2050./2

If the world exceeds a global temperature rise of 1.5 C for an extended period, there will be a significant increase in the risk of irreversible changes to the ecosystems on which our economy and communities rely.

There is scientific consensus that rapid and sustained global greenhouse gas (GHG) emissions reductions in the next decade will ensure less adverse climate impacts than if the world waits. This is supported by the 2021 Glasgow Climate Pact that establishes an annual high-level ministerial roundtable on pre-2030 ambition and new rules to hold countries accountable for progress.

Not only is it in the national interest to avoid worsening climate impacts, but Australia is also well positioned to benefit from decarbonisation through our natural resources, skills, and trade connections. Australia's largest trading partners are committed to achieving net-zero, and the global financial markets that Australia participates in continue to shift their support to a net-zero transition. In Australia, this transition will require investment of around $2.5 trillion (AUD) over the next three decades./3

Australia is in the top 10 highest countries in the world for GHG emissions per capita./4

As a nation there is growing momentum to achieve net-zero by 2050 or earlier. The Federal Government and all state and territory governments have committed to net-zero by 2050. In addition, cost-effective action by the states and territories in line with their net-zero emissions targets would achieve up to a 42 per cent reduction on 2005 emissions by 2030 alone./5

The new Federal Government has also ratcheted up Australia's 2030 emission reduction target to 43 per cent (below 2005 levels) - with half of the states and territories current 2030 targets higher than 43 per cent. Of ASX 200 companies, almost half have made net-zero commitments,/6 and this number is expected to continue growing. Australian consumers are also increasingly considering the environment when making purchasing decisions./7

It is expected that renewable energy will make up most of Australia's electricity supply by 2030, with one scenario from the Australian Energy Market Operator anticipating 93 per cent renewable electricity in Australia's largest grid./8

Electric vehicles will account for 35-100 per cent of Australia's new vehicle sales by 2050 (up from 2 per cent today), depending on the specific scenario./9

This transition will bring with it considerable opportunities for insurers, such as a dramatic shift in underwriting practices as new energy technologies are scaled up.

1. Bureau of Meteorology (2020) State of the Climate.

2. McKell Institute for the Insurance Council of Australia (2022) Insurance Catastrophe Resilience Report 2021-22.

3. Based on global estimate in GFMA, BCG (2020), Climate Finance Markets and the Real Economy, GFMA. Scaling emissions estimates for each sector to Australian emissions intensity. In line with other publicly availably estimates on Australia's transition costs, which range from $1.1T AUD by the IGCC to $5T AUD from Griffith, AFR.

4. Climate Action Tracker (2022): Country summary: Australia; World Bank. CO2 emissions (metric tons per capita) - Australia | Data (worldbank.org).

5. Climateworks (2021) State and territory climate action: leading policies and programs in Australia.

6. SMH (2022), Net-zero doubles for top 200 firms, but investors want more detail.

7. BCG (2021), The Customer Sustainability Journey.

8. AEMO | 2022 Integrated System Plan (ISP).

9. CSIRO Electric Vehicle Forecast May 2021.

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* The role of the general insurance sector

Australia's general insurance sector provides protection for 35 million homes, buildings and vehicles against the physical and financial impacts of extreme weather events.

The Insurance Council of Australia represents general insurers and reinsurers across Australia. Collectively its members cover approximately 90 per cent of general insurance sector policies, representing $60.2 billion in annual Gross Written Premiums (GWP) and $78 billion invested assets./10

Insurers operate in a global market, sourcing capital and reinsurance outside of Australia. Reinsurers, investors, financial disclosure standards, regulators, and customers are increasingly expecting insurers to play a role in the transition to net-zero, to improve transparency around insurance-associated emissions and demonstrate insurers understand and are managing climate risk. To ensure Australians continue to have access to affordable insurance protection, Australia must increase investment in the resilience of the built and natural environments, and in parallel, address the underlying cause of more severe weather events by reducing GHG emissions.

The insurance industry has a key role to play as the industry shares a deep understanding of risk to help improve Australia's resilience to a changing climate and extend the frontiers of insurability. At the same time, insurers are committed to reducing their own GHG emissions to net-zero. This will require insurers to reduce operational emissions, the emissions associated with underwriting activities, claims supply chain, and investment decisions.

The Insurance Council looks forward to continuing its long-standing engagement with governments, regulators, and other key stakeholders to promote a prudential policy and regulatory environment that aligns with best practice, supports climate change adaptation and mitigation, and helps each of its members to set and pursue their own net-zero targets with confidence. In addition, the Insurance Council looks forward to working with the wider financial and business community, and civil society to strengthen the sharing of best practice and support the net-zero transition of the Australian and broader global economy.

* The purpose of this roadmap

This roadmap reflects the commitment of the general insurance sector to achieving net-zero. It also provides guidance for the Insurance Council members on the role they can play in the decarbonisation of the Australian economy.

This roadmap covers GHG emissions associated with all aspects of general insurance and reinsurance, referring to three scopes of emissions:

* Scope 1

Direct emissions from an organisation's activities

* Scope 2

Emissions from electricity that is used during an organisation's activities

* Scope 3

All emissions that are indirectly generated by an organisation's activities

While the Science Based Targets initiative (SBTi) guidance for financial institutions is that inclusion of some types of Scope 3 emissions beyond investment is currently optional - this position may change as emissions reduction methodologies and practices in the financial sector matures.

The roadmap is structured around five pillars, addressing overall climate commitments in Pillar 1, the full scope of insurer's emissions in Pillars 2, 3, and 4 (as outlined in Exhibit 1), and the role insurers can play in strengthening resilience in Pillar 5. Throughout, the Insurance Council calls for targets in line with a 1.5 C degree pathway. The Insurance Council acknowledges the Paris Agreement, which calls for holding the increase in global average temperature to well below 2 C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 C. The Insurance Council acknowledges that the IPCC AR6 WGIII/11 report finds that without immediate and deep emissions reductions across all sectors, limiting warming to 1.5 C is beyond reach.

The Insurance Council recognises that its membership is diverse, and that each member will face unique challenges when implementing actions to decarbonise. The Insurance Council will provide support and guidance to all its members to help build knowledge, share best practice, and enable insurers to make decisions that can accelerate Australia's net-zero transition and strengthen its contribution to the global net-zero transition.

10. Based on APRA data for 2021 GWP and AUM for all ICA members, covering 95 per cent the General Insurance industry in Australia.

11. Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.

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This community of practice is open to all general insurers. The roadmap serves as a best practice framework to assist insurers in the development of their individual net-zero journeys. Each member is encouraged to use this framework or develop a different approach that it deems most suitable for the purpose of reaching net-zero.

The Insurance Council also acknowledges that its understanding of climate change, its impacts, and the role general insurers can play, is rapidly evolving. The Insurance Council will publish a yearly update tracking progress against the roadmap. The Insurance Council also seeks to treat the roadmap as a living document that will be updated regularly to ensure it reflects the latest insights on climate action for the general insurance sector.

Finally, achieving the milestones outlined in this roadmap will require strong emissions reduction policy at the local, state, and federal levels and the Insurance Council will advocate on behalf of its members for government policy settings that will enable Australia's transition to net-zero, in line with the Paris Agreement.

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Exhibit 1: Defining the greenhouse gas emissions footprint for insurers

Exhibit 2: Climate change roadmap summary/12

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12. The targets outlined are a set of recommendations based on best practice, they are not legally binding

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Pillar 1

The insurance industry's net-zero commitment

The Insurance Council of Australia supports strong action on climate change, including working with the insurance industry to achieve net-zero emissions, no later than 2050. To reach this long-term goal, the Insurance Council acknowledges emissions must rapidly decrease this decade in line with a global target of approximately 50 per cent emissions reduction by 2030.

Insurance Council members are encouraged to set interim targets consistent with a 1.5 C net-zero transition pathway, with target date(s) of no later than 2030, a focus on substantial emissions reduction this decade and align with best practice methodologies from initiatives such as the UN-convened net-zero alliances, when they become available./13

Where possible, targets should be verified by an appropriate institution such as the Science Based Target Initiative (SBTi) or relevant UN-convened initiatives. Some members may choose to set all five-yearly targets upfront, whilst others may set them on a rolling basis.

In Pillar 1, the Insurance Council outlines a set of best practice targets and milestones to support each of its members in individually meeting these emissions reduction goals, accounting for global developments. The Insurance Council describes the short-term actions that can be taken to lower emissions and indicates how the Insurance Council will help accelerate the development of measures to assist individual insurers in achieving net-zero across areas of emissions where further work is still required, like underwriting and the broader supply chain, including claims supply chain.

The Insurance Council will update progress against the milestones in this roadmap annually, and work with relevant stakeholders to create a supportive regulatory environment, empowering individual insurers to each develop their own climate strategies. The roadmap itself will also be updated regularly to reflect updates to the latest climate science and solutions.

Pillar 2

Net-zero industry operations

For general insurers, operational emissions are driven by insurer activity emissions. Many general insurers in Australia and globally have already committed to significant reductions in their own operational GHG emissions across Scope 1 and Scope 2, with some insurers also committing to reduce emissions across Scope 3. The Insurance Council encourages all of its members to commit to net-zero for these emissions by 2030.

The claims supply chain accounts for the vast majority of operational emissions for insurers and to reach net-zero, it is critical these are reduced. General insurers manage $150.6 million in claims every working day and brokers also play an essential role. By working with partners across the claims supply chain, insurers can contribute to decarbonisation well beyond their own operational footprint - and across all Australian communities.

By 2025, the Insurance Council encourages members to make a 2050 net-zero commitment across claims supply chains, with a focus on the most material supply chains. This implies that members have benchmarked their supply chain emissions and set targets in line with reaching net-zero no later than 2050. To make this possible, by 2024 the Insurance Council, in coordination with its members, are encouraged to identify global and domestic methodologies and frameworks that can assist in defining attributable emissions across insurance/ reinsurance claims supply chains.

Pillar 3

Net-zero with insurers' customers

Underwriting plays an important role in Australia's net-zero transition as the general insurance industry writes policies that provide protection for 35 million homes, buildings and vehicles against the physical and financial impacts of extreme weather events.

The members of the Insurance Council underwrite $49 billion of GWP for general insurance products in 2021, approximately 95 per cent of the Australian general insurance market. As the global shift towards net-zero underwriting activity continues, the Insurance Council aims to recommend a pathway to its members to help them in seeking to achieve net-zero underwriting in Australia.

13. The Net-Zero Insurance Alliance.

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This roadmap covers both the opportunity and business case for underwriting the transition as well as the challenges that insurers face as a sector - focusing on near term actions and levers for underwriting decarbonisation to support both insurers' businesses and their customers.

The Insurance Council encourages insurers to align with the global standard developed by the Partnership for Carbon Accounting Financials (PCAF) to measure and disclose GHG emissions associated to insurance and reinsurance underwriting portfolios (insurance-associated emissions) no later than 2024. Currently, such a global standard is being developed in collaboration with the NZIA and the first version of the PCAF standard for insurance-associated emissions is expected to be produced by the end of 2022. The Insurance Council also encourages members to set targets for net-zero emissions in underwriting no later than 2025, with five-yearly interim targets in line with a 1.5 C net-zero transition pathway. Insurers who are members of the NZIA will align with the PCAF methodology by 2023 and set targets six months after a target-setting protocol has been established in 2023. However, given Insurance Council members range considerably in size and capacity, a date range has been provided to reflect this. If the methodology is delayed, members may be delayed in setting the associated interim targets.

Pillar 4

Net-zero investments

Australia's transition to net-zero will require an estimated $2.5 trillion investment over the next three decades. This will create investment options across all asset classes for insurers. Investing in the transition can provide access to growth markets and lower the physical and transition risks associated with investment. As such, net-zero investing is an important step for insurers to future-proof their portfolio.

With an increasing number of insurers globally committing to net-zero investment portfolios, the Insurance Council outlines the key strategies that can be used to reduce portfolio emissions. The Insurance Council indicates how it will support the process to agree on nationally consistent measurement and reporting standards, aligned with global standards.

The Insurance Council also indicates how to support the development of a taxonomy for sustainable investments to simplify net-zero investing and increase the supply of green investable assets.

By 2023, the Insurance Council encourages its members to commit to a net-zero investment portfolio no later than 2050, with five-yearly interim targets in line with a 1.5 C net-zero transition pathway.

Pillar 5

Creating a more resilient Australia

The cost of climate-related extreme weather events is expected to climb significantly in Australia.

Research commissioned by the Insurance Council calculates that the annual direct cost of extreme weather events could reach $35.24 billion by 2050,/14 and the Australian Business Roundtable estimates that even in a low emission scenario the economic (not insured) costs could increase to approximately $73 billion per annum in 2060./15

Severe weather events pose increasing risk to our built and natural environments, as well as our communities, which in turn can slow the transition to a net-zero economy.

This will also make it increasingly challenging to provide affordable insurance for the Australian people and economy unless Australia significantly increases the resilience of its built and natural environments. This can only be done through collaboration between the federal, state and local governments, regulators, planning agencies, and private sector parties such as developers, the construction industry, and insurance companies. All stakeholders must work together to embed resilience throughout the development value chain, from land use planning and zoning to design, development, construction, and refurbishment.

Insurers can play an important part in this process, given their role as risk managers, investors, and drivers of recovery and rebuilding after loss. The Insurance Council encourages members to help strengthen Australia's resilience by sharing risk intelligence on climate change hazards across the value chain, helping to make resilience more investable, and helping customers make more resilient choices. A resilient Australia is integral to achieving net-zero goals.

14. McKell Institute for the Insurance Council of Australia (2022) Insurance Catastrophe Resilience Report 2021-22.

15. Deloitte Access Economics (2021). Special report: update to the economic costs of natural disasters in Australia, Australia Business Roundtable for Disaster Resilience & Safer Communities.

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The report is posted at: https://insurancecouncil.com.au/wp-content/uploads/2022/11/ICA-Climate-Change-Roadmap_NOV-1-FINAL.pdf

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