16: The role of insurance in sustainable finance

Anna-Marie:

Hello and welcome to the latest episode of 30 for Net Zero 30 where we're speaking with 30 change makers around the globe on steps to take now in order to reach 2030 goals. I'm Anna-Marie Slot, Global ESG and Sustainability Partner at Ashurst.

Anna-Marie:

Today, several weeks after COP26, we are looking at the role that insurance plays in the wider scope of sustainable finance, and I'm very pleased to be joined by Julian Richardson, CEO and Founder of Parhelion, an insurance and risk finance business focused on carbon markets, climate change risk, and renewable energy investments.

Anna-Marie:

Thank you so much for joining me today, Julian, looking forward to our conversation about something that people don't always understand is critical and important to the way the financial markets work, which is insurance. Maybe we could start today with a few minutes of description about your own background and how you've come to be here today.

Julian:

Yeah, sure. Nice to see you, Anna-Marie. My background is I'm an insurance person through and through. I started my career at a company called Sedgwick, on the broking side, doing power and mining business, and then moved over to the oil and gas side. And I had that through Marsh and then moved to the underwriting side of GE ERC Frankona, mainly on the oil and gas side, still marine and energy business.

Julian:

But for the last 15 years I've taken what I learned from the insurance industry, dealing with these very large, very complex risks, and trying to figure out what the role of the insurance industry is in, originally, the carbon markets and then, more broadly, the climate finance sector, and that's extended through, out to sustainable investment.

Julian:

So I've been working at that nexus of the different stakeholders that we need to engage to transition to a more sustainable future. So it's working with policy makers, working with insurers and reinsurers, working with investors, working with project developers and the multilateral institutions to really understand what the role of insurance is in sustainable finance.

Anna-Marie:

Very interesting, and really interesting that you've had all of these different roles where you were looking at the risk, responsible for covering the risk, and now looking at how that fits into sustainable finance in a bigger ecosystem. Is there, has there been, or, given how long you've been in the business, have you felt any kind of a shift over the last kind of 18 months, 24 months? I mean, we're here after COP26 is completed so, you know, that was on the news, but have you seen that growing or do you think that's a recent thing?

Julian:

I've definitely seen a real inflection point reached sort of 18, 24 months ago, but it is built on a lot of work that a lot of people have been doing across those stakeholder groups that I mentioned previously, and civil society of course, to try and build momentum into climate and sustainable finance. But the shift that has taken place more recently has been fantastic and a little bit surprising that it's just taken off so quickly and I think the pandemic must have had something to do with it. I couldn't tell you exactly why that is but I'm pleased that it has accelerated this work and certainly, within the UK, hosting COP at Glasgow this year has brought it front and center to our own national psyche, you know, the challenges of climate change and the implications and indeed let's not forget the opportunities. So there's been this phenomenal uptick in activity, interest, and sometimes even action which is most important.

Anna-Marie:

Yes, no, actually action is the key point and really should be the output of all of the conversations, certainly. In terms of action, I guess that's a good lead-in to where we generally go next, which is, what are you seeing as the actions that kind of need to take place next? Mark Carney has come out with this pledge of 130 trillion of private finance. I think people who don't work in the sector, it's hard to conceptualize what that means but, I think, particularly with your background, it'll be really interesting to hear what that means in terms of how the insurance world and sector responds to that kind of a focus on sustainable financing.

Julian:

Yeah, well, I think the important thing that really needs to happen is we should be doing our day job, right? And the day job of the insurance industry is underwriting. That's the part of the balance sheet, or an insurer balance sheet, where we take risks, where we have that risk appetite. Historically where we've seen the insurance industry engaged it's largely been on the asset side, so seeing the insurers as institutional investors, which of course they are, but with their investment portfolio they don't really have a significant risk appetite. So a lot of the international community's focus has been on the asset side of the balance sheet and we would argue that it really needs to move the focus to the underwriting side because that's where we as an industry take risk and can have most impact with the capital pool that is the insurance industry.

Julian:

You know, the numbers that people talk about, "We need a trillion dollars every year for the next 30 years," or whatever, they are sort of big numbers and difficult to get your head around but the insurance industry, the property and casualty insurance industry, is a $2 trillion pool of capital. Of course when we use that capital in underwriting we get very effective leverage so for $1 of capital we can write $X dollars of risk and that's why we need to bring the underwriting community in to use that capital effectively and also do its day job. Insurance, I always say, is the great enabler. Nothing gets invested unless it's insured and that's because insurance takes risks that the other forms of capital, debt and equity, can't or won't take. And so unless insurance capital is there to take those risks that the equity and debt providers can't or won't take, then investment doesn't happen.

Julian:

So really the insurance industry is sort of the glue and the oil of the capital stack and by bringing in the underwriting community to focus on sustainability they can bring new products, de-risking products, that will help more capital be deployed in sustainable investment opportunities and remove those risks which typically act as barriers to capital being deployed. So that's the first action we need to see.

Julian:

We also want to see more collaboration across stakeholders because, interesting, the Sustainable Development Goal 17, I think it is, is about partnerships and we need to collaborate broadly with policy makers and other capital providers and civil society to understand what we can do as an industry and where our capital is best and most effectively used.

Julian:

One example of that is adaptation and resilience finance. A lot of the attention has historically been on mitigation so we understand investing in wind farms and solar plants which mitigates emissions or reduces emissions but we know climate change is here already and, again, in the international community, a lot of the attention has been on why is all the attention on mitigation? Why is more money not flowing to adaptation and resilience? And, again, this is a great opportunity for the insurance industry because resilience finance is fundamentally insurance. We can't stop catastrophes happening but when they do happen we have to enable communities to bounce back quickly and resiliently from those events. So the insurance industry has an enormous role to play in it, not just sort of providing insurance-type covers, but the expertise in modeling that exists within the industry, our ability to transfer and trade risk, it is really important to bring that to communities.

Julian:

People talk about closing the protection gap, which is a rather simplistic thing to say, but it is an important thing to enable more people to be covered and so that when disasters do happen, they're able to bounce back much more quickly and build that resilience into the community.

Julian:

So those are a couple of things that we want to see mobilizing that underwriting community, and also working on this protection gap. And of course that means we need to get the policy makers and the international development community aligned with what we can do in the insurance industry.

Anna-Marie:

And really interesting points there that I think, especially around risk, you know, and during COP there was a lot of discussion about what the markets can do and the fact that this is a fundamental mispricing because of these externalities that people haven't historically put into their models. I mean, you make a very good point, the insurance industry has probably, I would think, the longest models in term of time horizon of most players in the finance market and to have the insurance industry bringing on board how to price these externalities and the shifting impact of climate change now and in the future, as you say, I think that is a huge enabler to the rest of sustainable finance to get the money moving in the right direction overall.

Julian:

Without a doubt.

Anna-Marie:

I always ask, you know, obviously an area that you've spent a lot of time in and a lot of your working life focusing on, do you have any personal commitments around net-zero, like kind of next year or so, are you inspired by what's come out of COP?

Julian:

Well, I've been working in this area for a long time. I did my Master's thesis, on carbon trading risk, 20 years ago, in fact, over 20 years ago. The first COP that I went to was COP12 and we're now on COP26 so I've gone through many cycles of being inspired and then falling into despair at the levels of inaction and action. What I have learned over that time is that this is an incremental process and it's about bringing people with you. And so whilst we saw a good steady drumbeat of announcements coming out of COP that gave us reasons to be cheerful we also recognized that some of those announcements were either lacking in teeth or lacking in funding or lacking in some key partners to them.

Julian:

But it's all about moving in the right direction. I wish there was a silver bullet and we could transition overnight but I'm also a realist and so I recognize that's not going to happen. I do think we have to just keep focused on the goal and we have to use the momentum that has been built and that has been built up over the last 20 years and more and that has been slightly catalyzed over the last 24 months and not let that go to waste. The whole Paris Agreement is based on continual improvement to the nationally determined contributions and as more people get involved that will build further momentum that will become unstoppable and we will get there eventually.

Anna-Marie:

I have to say that I agree with you, there were announcements, there was probably some lack of detail in many of those announcements, but one thing that I did find very interesting coming out of COP was this point that the NDCs, the nationally determined contributions, will be reviewed not in five years time, which has been kind of the historic process, but next year at COP27. I think that that hasn't necessarily gotten a lot of airtime but really changes the dynamics around coming back together at the next COP.

Julian:

It does, it focuses the mind of policy makers and it creates a sense of urgency, and a little bit of competitive tension as well is always helpful.

Anna-Marie:

So from that big picture of COP and your impressions of COP, which are quite insightful around how it's been working, bringing that back to your daily routine, what is that going to look like for you going forward?

Julian:

Well, we have a really exciting project on at the moment and that's to create the world's first sustainable insurance company. We saw at COP there was an announcement for a net-zero underwriting alliance which commits to underwriting on a net-zero basis but that's by 2050 and we don't think we need to wait that long. So we're going to create a net-zero underwriter that will be net-zero now. We are in the process of a $500 million capital raise to launch this vehicle and it's really exciting because, well, what does it mean to be a sustainable insurer?

Julian:

Well, first of all, the assets will be fully screened and allocated based on ESG and sustainability. That in itself will be unique. Then secondly, which will be even more unique, is we'll take those same screening and filters and apply it to the underwriting side because it's no good having clean investment portfolio if you are then underwriting all those things that you say you won't invest in, it just doesn't make sense.

Julian:

So having both the assets and the liabilities [inaudible 00:15:44] the underwriting side fully aligned to ESG and sustainability is crucial and then, of course, the operations as well. So we'll be walking the talk, and that includes having a strong commitment to diversity and inclusion. We have a majority female executive team, which I'm delighted in, and good representation on the diversity across the other elements of diversity. We're going to be a B Corp. People have understood or heard about impact investing, well, we also want to develop impact underwriting. That's when I talk about bringing the underwriters to offer new products and solutions that is going to drive investment into sustainable investing opportunities. So that's my personal project and we've been working on this for quite a few months now and we hope to have it launched early next year.

Anna-Marie:

Exciting times, Julian.

Julian:

Indeed.

Anna-Marie:

So as your takeaway, if there was one thing that you wanted people to be able to take away or remember from this, I mean, you've covered some really interesting points, I think, insurance as both the glue and the oil of how finance works and really that big question that lots of people have talked about, you know, how do you make projects that work and bankable projects, insurance is certainly massively key to that, as well as collaboration and partnerships and the protection gap, one takeaway, what would that be?

Julian:

Well, I think the message I'd like to reinforce and, you know, if you're a hammer every problem is a nail, but it's the role of the insurance industry is really important in delivering a sustainable future, as you say, whether it is taking risks that enable other forms of capital to be deployed, whether it is how clients are spending their premiums, right? The Fortune 1000 companies spend probably $40 billion a year on insurance and whilst all companies are aligning their procurement policies to sustainability and adopting ESG throughout their businesses, that procurement doesn't stop at physical goods. It must also include financial services so when a company is thinking, you know, "I'm going to spend part of this $40 billion on insurance. Who's my capital, who's my premiums going to be spent with? Who's it going to be commingled with? And what is that insurer going to be doing when it invests my premiums?" So, driving sustainability through how companies spend their insurance premiums and how the insurance industry can enable the transition to sustainability is my key message.

Anna-Marie:

Great, I think that's a perfect takeaway. Thank you, Julian, for your time today. It was very interesting and thanks for joining us.

Julian:

Pleasure. Thanks, Anna-Marie.

Anna-Marie:

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