As climate change continues to dominate the discourse about sustainability and the need for economies to pivot to renewable energy as an alternative to fossil fuel, an increasing number of global insurance companies are turning their backs on fossil fuel companies and projects.
These decisions are largely attributed to the result of mounting pressure from environmental campaigners who are pushing for a market-wide ban of insurance coverage for oil, coal and gas projects and companies.
Towards the end of 2021, Lloyd’s of London – the world’s oldest and largest continuously active insurance marketplace – announced that it would stop new insurance cover for coal, oil sands and Arctic energy projects by January 2022, it also undertook to completely pull out of such businesses by 2030.
Lloyd’s had previously come under fire for being slow to exit fossil fuel underwriting and investment. Now it wants to align itself with the United Nations (UN) Sustainability Development Goals and the principles in the Paris Climate Accords.
Similarly, Swiss Re, the world’s second biggest reinsurer, said in March this year that it would not insure most new oil and gas projects, due to the growing pressure on big business to do more to help the world deal with global warming.
These announcements follow the trends of the Environmental, Social and Governance (ESG) – movement gaining traction within the insurance industry, that has been emerging over the past few years. The pressure on South Africa’s insurance companies to move away from fossil fuels is not yet as intense because the country’s renewable energy sector is still underdeveloped. However, the pressure is bound to ramp up as coal remains the country’s largest energy fuel source.
According to the research into the state of renewable energy development in South Africa, coal energy accounted for over 85% of the electricity generation in 2016. Then followed nuclear and natural gas-derived energy. While coal has successfully helped generate electricity, it has also placed South Africa among the top 10 greenhouse gas emitters in the world.
Unfortunately, the country’s reliance on fossil fuels is unlikely to change significantly in the next two decades. This is due to the relative lack of suitable alternatives to coal as an energy source. However, efforts are being made to develop renewable energy sources and carbon emission mitigation in South Africa.
Reports show that at the end of last year, the government had awarded 25 new contracts for renewable energy projects. These are worth a total of R50 billion ($2.8 billion). The contracts are geared towards the reduction of the country’s heavy dependence on coal.
The wheels of South Africa’s renewable energy train are turning – albeit slowly. This factor should prompt the local insurers and reinsurers to work on their preparedness for shifting to fossil fuel alternatives, in the coming years.
Not only should the local insurance industry do an introspection of its long-term commitment to supporting fossil fuel companies and projects but should also define and concretise its support for renewable energy initiatives, taking into consideration the impact that it could have on the country’s environmental, social and governance goals.
A recent report by Development Asia states that against the backdrop of climate change and increasing carbon emissions, various insurance firms in major cities around the world are starting to take a more active role in green investments and product development.
In essence, insurers must start expanding their role in clean energy, specifically looking at new and renewable energy projects that are less sensitive to financial market conditions and that have high potential to generate stable profits in the long-term.
It cannot be overlooked that while renewable energy promises to provide a cleaner future, the uncertainty of new technologies, financing and ownership challenges, as well as other obstacles, mean that renewables can be risky for insurers and investors alike.
For many insurers, the biggest concern is that there isn’t enough of a track record yet and without a significant footprint, insurers are unable to fully discover all the risks that could surface in the future.
Migrating from fossil fuel to renewable energy might prove to be good business for insurers in the long-term. Renewable energy should be seen as an intuitive alternative to fossil fuel revenue for insurers. The growth projections for the sector look promising, insurers must strive to understand the new business landscape presented by the shift. They must adopt new business models and price policies to remain effective, as alternative energy continues to evolve.