Power shift

Power shift

The Government says there is room for fossil fuels in its plan to reach net zero emissions, but the insurance market may have other ideas

By Andy Swales

Less than a month before the start of the UN climate summit in Glasgow, the Australian Government aligned itself with other nations and made a commitment to hit net zero carbon emissions by 2050.

It was a “heroic” step, according to conference host Boris Johnson.

Others were far less impressed. Prime Minister Scott Morrison’s plan came with no accompanying pledge to raise previously set carbon-cut targets for 2030. And the “technology-driven” road map for achieving neutrality in 29 years was light on new policies, with a reliance on carbon offset schemes and controversial programs such as carbon capture and storage.

One thing Mr Morrison was sure of was that doing things “the Australian way” does not include steps to limit the production, use and export of fossil fuels.

“We want our heavy industries, like mining, to stay open, remain competitive and adapt, so they remain viable for as long as global demand allows,” he said. “We will not support any mandate – domestic or international – to force closure of our resources or agricultural industries.”

The Climate Council labelled the 2050 pledge “half-baked”, with Chief Executive Amanda McKenzie declaring: “Net zero is a joke without strong emissions cuts this decade.”

Australian National University climate scientist Emeritus Professor Will Steffen tells Insurance News the Government simply “doesn’t have a plan. Their approach is best described as a thinly veiled coat of greenwash to keep the fossil fuel industry going for decades into the future.”

But despite the Government’s backing, there are signs the tide may be turning against the fossil fuel industries anyway.

How will demand and investment hold up as the world moves to a low-carbon economy? And will producers still be able to insure their operations?

Australia’s top three insurers – in line with other major (re)insurers, particularly in Europe – have made commitments around exiting fossil fuel underwriting.

IAG, which in November published its latest Climate and Disaster Resilience Action Plan, has committed to no longer underwriting groups that are predominantly in the business of fossil fuel extraction or coal power generation by 2023.

It says that at June 30 this year gross written premium relating to all fossil fuel extraction and power generation was less than 0.005% of the insurer’s total.

“In addition to reviewing and updating our Climate and Disaster Resilience Action Plan every three years, we review all our commitments and goals on an annual basis and report on our progress through yearly scorecards,” IAG’s Executive General Manager Safer Communities Ramana James tells Insurance News.

Suncorp says it will no longer underwrite fossil fuels by 2025, and its exposure to fossil fuel activities already makes up less than 1% of its commercial insurance business.

In the group’s Climate Change Action Plan, published in September, Suncorp Chair Christine McLoughlin says its approach is up for review on a regular basis.

“We now intend to update and publish key priorities and progress against this plan in our annual report each year. This iterative and responsive approach ensures we are well placed to keep pace with the latest scientific and public policy developments and international agreements including COP26 [the Glasgow summit], the UN Intergovernmental Panel on Climate Change and the Taskforce on Climate-related Financial Disclosures.”

QBE has stopped covering new thermal coal projects and will phase out thermal coal underwriting by 2030. It will start restricting insurance for oil and gas projects using the Paris Agreement as a benchmark from 2030.

Environmental campaign group Market Forces says gaps remain in the major insurers’ commitments and is keeping up the pressure for stronger action in line with the Paris goal of limiting global warming to 1.5 degrees.

“IAG and Suncorp are still open to underwriting new gas-burning power stations and oil and gas pipelines,” Market Forces campaigner Pablo Brait tells Insurance News.

“QBE, the laggard of the trio, has practically no restriction on its oil and gas underwriting, with its policy outlining business as usual until 2030, apart from tar sands. QBE’s do-nothing approach to one of the single biggest sources of carbon pollution in the midst of the climate crisis is unacceptable.”

Mr James expects the trend for major insurers to cut their exposure to fossil fuel projects will gather pace.

“In fact, this is already happening, not only in Australia but globally, and not only in insurance but across a range of sectors.

“We expect to see even further acceleration in action from the private sector as part of the transition to net zero and as new technologies and opportunities emerge to support these businesses.

“While it is good to note this progress by the private sector, we also need consistent and strong policy on climate action from all levels of government in order to support the long-term resilience and sustainability of our economy, society and environment.”

Finity Consulting Principal Rade Musulin says Australia will require an “orderly” decarbonisation process.

“Australia, along with other countries, must build a consensus between political parties on the general framework for decarbonisation that can withstand periodic changes in government, because business and communities need a degree of policy stability to make long-term investments,” he tells Insurance News. “This will require compromise between various stakeholders.

“Like it or not, fossil fuels are deeply embedded in our economy, and decarbonisation will take time. It should be done in a way that reduces the chance of a political backlash that could slow the pace of change.

“We have agreed on the goal (net zero by 2050); now the question is identifying the path to get there and the pace at which we do so.”

Insurers can play a role in this orderly shift, he says.

“Individual insurers and reinsurers will make their own assessments of how quickly they reduce fossil fuel underwriting, but most will be moving in this direction over time.

“Insurers provide important loss control services, safety incentives, funds to compensate for accidents and so on, so there are social consequences from risks losing certain types of insurance coverage. This is another argument for an orderly decarbonisation process.”

Earlier this year, in a submission to a federal parliamentary inquiry that has examined the treatment of export industries by insurers and other financial services providers, coal giant Adani hit out at IAG, Suncorp and QBE.

The firm behind the huge – and hugely controversial – Carmichael mine project in central Queensland described the insurance industry’s “boycotting” of thermal coal as “misconceived” and warned of consequences for the economy.

“These Australian insurance companies appear to have followed a global divestment push led by European insurance companies with little to no regard to their national responsibilities to the workers and companies of Australia,” the submission says.

“The consequence of the banking and insurance sectors removing support for the thermal coal sector has the immediate impact of increasing financing costs associated with developing new projects or maintaining existing operations … In short, by withdrawing services from the Australian thermal coal sector, the finance and insurance sectors are exporting Australian livelihoods offshore.”

The Minerals Council of Australia told the same inquiry – which has yet to report – that miners are facing a shrinking pool of insurers, which is driving premium rises of up to 600%. It says some mines have to self-insure instead.

In April, Insurance News reported how CRE Insurance Broking, which provides cover for the resources and energy sectors, had called for a rethink on the industry’s response to anti-coal activism as clients struggle to obtain cover.

An open letter, written by CRE’s Broking Director Adam Battista, said campaigns accusing insurers of failing to meet environmental social governance obligations have resulted in almost half the global reinsurance capacity available evaporating in two years.

As a result, he said many mining and mining-related clients face commercially unacceptable conditions or premiums, or cannot find appropriate cover.

“Some are already faced with the prospect of self-insuring entirely,” Mr Battista said. “Those insurance companies left in the market that do provide cover can afford to become far more selective of the risks they take on.”

He also noted that often distinctions are not made between metallurgical coal – used to make steel – and power-generating thermal coal. And he said in terms of emissions, Australian thermal coal is preferable to that supplied by some other countries.

CRE declined to comment for this article. The Minerals Council was contacted for comment.

Mr Musulin says that in the short term, issues around availability or affordability of insurance are only likely to spell the end for extraction or power plant projects that are already “at the margins of viability”, but over time there will be larger effects. It may be that self-insurance, mutual insurance mechanisms or direct government support become necessary.

“Generally, when insurance has become unavailable or unaffordable for other reasons these type of solutions have emerged,” he says.

“One would expect nothing different here. Whether that is good policy or not is another matter.”

In the meantime, IAG’s Mr James expects insurers to increasingly switch their attention to green energy and the technologies that can aid the push to net zero.

“Creating and adopting any new or emerging technologies involves risk and uncertainty, so there is a natural role for insurers to help create space for innovation by empowering companies to develop, implement and expand the use of net zero technologies.”

An Insurance Council of Australia spokesperson says the industry will “continue to support and enable the effective risk management of Australian exporters and associated businesses, consistent with the regulatory guidelines on managing the financial risks of climate.

“We recognise that our regulators are keeping pace with global standards. ICA is working with the community, our members, all levels of government and other stakeholders to be able to continue to offer affordable and accessible insurance.”

The council says it “recognises the important role we have supporting our members’ transition to net zero by 2050 in the most appropriate way for their business”.