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Insurers Have Huge Role As Clean Energy Investors

Conversations about climate change and the insurance industry usually focus on catastrophic storms and their damaging financial ripples for insurance providers. Given skyrocketing extreme-weather losses in recent years, it’s surely a legitimate issue that should be making insurers re-think their business models.
by Mindy LubberForbes Sustainable Capitalism Blog Posted on Mar 03, 2014

Conversations about climate change and the insurance industry usually focus on catastrophic storms and their damaging financial ripples for insurance providers. Given skyrocketing extreme-weather losses in recent years, it’s surely a legitimate issue that should be making insurers re-think their business models.

But insurers have another important role on the climate issue, which is how to invest their vast sums of money and whether substantially more could be supporting low-carbon technologies that will reduce the pollution that’s warming the planet.

The simple truth is that reversing climate change will require trillions of dollars of additional investment in solar, wind and other clean energy projects.

In fact, total global investments in clean energy must be doubled to $500 billion a year by 2020 and quadrupled to at least a trillion annually by 2030. At Ceres, we’re calling this the Clean Trillion, and only by reaching these goals do we have a solid chance of limiting global warming increases to 2 degrees Celsius. At current investment levels, global temperatures are on a path to increase by 4 to 5 degrees, a potentially catastrophic scenario for the global environment and economy.

Although insurance companies have the largest investment portfolios in the world – with assets totaling about $25 trillion – their money has largely been sitting on the sidelines when it comes to clean energy. The Organization for Economic Cooperation and Development estimates that insurance companies and pension funds invested only $22 billion in clean energy infrastructure from 2004 to 2011, which is less than 2.5 percent of the total amount invested in clean energy financing during those years. That is a miniscule amount – and unless it grows exponentially we have nary a chance of slowing climate change.

But the industry’s tepid interest in clean energy is changing.

The combination of lower renewable costs and long-term buyer agreements to use the power is opening the door for many more insurers to invest in clean energy projects, either directly or indirectly.

For example, MetLife has a major ownership stake in a 30-megawatt solar PV power plant in Texas, which has a 25-year contract to sell its power to a local utility. Allianz has 43 wind farms and seven solar parks in its portfolio, which are generating more than 1,000 megawatts of power across Europe.

Other insurers like Allstate and AIG are buying up bond issuances, whose payments are linked to cash flows from clean energy projects (mostly wind and solar). Even investment maven Warren Buffett is getting in the game: last year, a subsidiary of his insurance firm Berkshire Hathaway issued $1 billion of green bonds to build and operate solar farms in California.

While these dollar amounts are still relatively small, there are strong indications that exponential growth is just around the corner.

More than $2.6 billion in green bonds have already been issued in 2014, adding to the record $10 billion issued in 2013. In fact, this caused the Climate Bond Initiative to double its projections for green bond issuances in 2014, which it made only a month ago, to $40 billion. Bloomberg New Energy Finance envisions a potential $142 billion clean energy bond market from 225 utility-scale wind and solar projects in the U.S. and Europe alone.

Meanwhile, more insurers are making public commitments to invest in green bonds – among the most recent, the Zurich Insurance Group, which has set an initial target to buy $1 billion of green bonds.

Insurance executives cite similar reasons for their growing interest in clean energy investments: the ability to earn stable, risk-adjusted returns; reduced vulnerability to climate risks and financial market fluctuations; and a growing array of projects that are environmentally and financially attractive.

Among Zurich’s green bond investments, for example, is a World Bank project that is replacing inefficient light bulbs, refrigerators and air conditioners in low and moderate-income households in Mexico with efficient models, thus avoiding an estimated 1.8 million tons of carbon pollution.

“If instruments and opportunities exist that provide market returns as well as tangible measurable environmental impacts, then I think that is a great investment opportunity,” said Cecilia Reyes, group chief investment officer at Zurich, speaking at the UN Investor Summit on Climate Risk in January in New York. “The question to ask is not why invest in green bonds, but why not invest in green bonds.”

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Reyes’ optimism aside, significant roadblocks must be overcome before clean energy investing gets anywhere closer to achieving the Clean Trillion.

Among the biggest hurdles is a lack of clean energy projects and fixed-income investment products available to insurers and pension funds. This is a big reason why green bond issuances in recent months have been selling out in a matter of hours.

Better standardization of what constitutes a climate bond or a green bond is an important step for sellers and buyers that will grow the market. By reassuring potential buyers about what they are purchasing, better standardization will minimize the due diligence burden on investors and reduce transaction costs for the sellers.

Another key step is stronger government climate policies – market signals – that result in a strong price on carbon pollution, thus making low-carbon technologies more financially attractive.

Ultimately, it’s about all public and private financial institutions – not just supranational organizations like the World Bank – entering the game with a broad universe of clean energy investment products that will appeal to more insurers and pension funds. Until policy and market conditions allow that to happen, insurers may have limited options for scaling clean energy investments to levels approaching the Clean Trillion.

Read the post at Forbes Sustainable Capitalism Blog

Meet the Expert

Mindy S. Lubber JD, MBA

Mindy S. Lubber is the president of Ceres and a founding board member of the organization. She also directs Ceres’ Investor Network on Climate Risk (INCR), a group of 100 institutional investors managing nearly $10 trillion in assets focused on the business risks and opportunities of climate change. Mindy regularly speaks about corporate and investor sustainability issues to high-level leaders at the New York Stock Exchange, United Nations, World Economic Forum, Clinton Global Initiative, American Accounting Association, American Bar Association and more than 100 Fortune 500 firms. She has led negotiating teams of investors, NGOs and Fortune 500 company CEOs who have taken far-reaching positions on corporate practices to minimize carbon emissions, water use and other environmental impacts. She has briefed powerful corporate boards, from Nike to American Electric Power, on how climate change affects shareholder value.

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