Insuring a sustainable future

Defence Force personnel and volunteers take part in the huge Fox River cleanup after a storm in Westland exposed old landfill. Photo / Supplied

This means making a decision today about things that are decades ahead, says IAG's Bryce Davies.

New Zealand needs to create an environment in which it has the information, ability and incentive to take a longer-term, wider view rather than a short-term view — that's the view of Bryce Davies, Executive Manager Corporate Relations at insurer IAG.

Just as individual companies like IAG can help resolve environmental, social and corporate governance (ESG) issues so can the financial system as a whole.

How the main players respond to ESG issues will have implications for the sector and for the stability of the financial system, says Davies.

"The impacts of water quality, our warming climate and inequality are profound and will create shocks and stresses for the financial system," he says.

The risks that ESG issues create must be identified, assessed and then managed.

One key area where climate change will increasingly affect the financial system is in the insurance industry, where insurance providers' use of risk-based pricing leads to increased premiums for high-risk assets.

Insurance providers who don't move to this will end up holding a higher-risk portfolio, which is commercially unsustainable, says the Sustainable Finance Forum's (SFF) Financing the Future interim report.

At the same time a rapid shift to risk-based pricing will cause affordability issues and affect land and property values — so it has to be done with care, using a range of measures to provide a "Just Transition" so there will be a mix of opportunities and necessary changes.

Davies, a leader on the Sustainable Finance Forum, who is looking at the market stability implications around the changing financial system, says it is about letting price signals do their work.

"If we put a price on these things, we have to let that price 'do its work' but we also need to ensure the change it drives is just and that people are not left behind," he says.

The country's knowledge of hazards and their impacts has advanced to the point where past decisions about where to build now need revisiting, says Davies.

"We have communities with growing exposure and vulnerability to natural hazards and for some, the only way to keep people safe, is by moving," he says.

Premiums which reflect that risk are a key signal and an incentive to take action, he adds.

"Any transition, be it low risk, clean water or low carbon, comes with the risk that people will be impacted, and some more than others," he says.

Understanding these risks allows us to ensure people aren't left behind, that the transition is just.

"We can't just swap one harm for another."

The Reserve Bank has signalled it will be working with the sector to better understand climate risk, says Davies. "Regulators need to understand the issues that are relevant and their potential impact on individual entities, markets and the whole economy."

Monitoring the financial sector's exposure to potential systemic risk such as climate change is an important defence mechanism, the SFF interim report says.

It notes that given the increasing risks to financial stability, the central bank is taking steps to use regulation and supervision more intensively to ensure the financial system is resilient in the face of increasingly severe shocks.

Continuity of government policy will also have a big influence on market stability. Broad, cross-party agreement on direction is vital, says Davies. "Political consensus is key, but also political will — we can't iterate our way out of these issues."

Government sets boundaries by which markets operate, he says. Businesses can urge the Government to do more if it is not happy with the pace of progress.

"There is a strong need to do more — and soon," says Davies.

Companies also need to take action today for tomorrow: "For business leaders, we will have choices about how we operate our businesses. Traditionally decisions have been made on a short-term, narrow basis but how do we create an environment with the right information, for a longer-term and wider term view?" he asks.

Companies are already taking action on sustainable finance to mitigate climate-change risk. Ports of Auckland has said it will be carbon-neutral by 2040 and is planning to build a hydrogen refuelling facility to help with this. It is also investing in the world's first electric port tug in 2021.

It's making a decision today about things decades ahead, says Davies.

"Watercare is making multi-decade asset decisions around wastewater and water. They are having to bring risk and future risk into consideration to be more flexible and adaptive about how to build and maintain that infrastructure, " he says.

This all involves more than a strategic economic analysis; risk is also factored in.

Meanwhile, Crown Research Institute Landcare Research, working with local iwi, is making recommendations on how land can best be used and invested in. Should it be turned into native forest or used for a more short-term business like beef farming? Landcare is weighing the risks.

It is thinking about national wellbeing and what will be handed on to future generations.

For any business, a broad "set and forget" approach to looking after assets is no longer good enough, says Davies. Organisations have to find ways to bring together all of these different perspectives and outcomes and weigh them up.

Read the Sustainable Finance Report here.