Butch Bacani is not your usual image of a United Nations official. A young looking 33- year old Phillipino, he talks passionately about the need for insurance businesses to adopt a more environmentally friendly approach. His favourite word proves to be “sustainability”.
As project manager of insurance, asset management and Asia Pacific task force of the the United Nations Environment Programme (UNEP) Finance Initiative, it his job to get the sustainability message across.
But what is sustainability? Bacani said, “It is development that meets the needs of the present without in any way compromising the ability of future generations to meet their own needs.” Okay, but what does it mean for insurance businesses?
Bacani talks of a “win, win scenario”. He explained,“From a business perspective, sustainability on a corporate level is a business approach that creates shareholder value for the longer term by embracing opportunities and managing risks derived from environmental, economic and social developments.”
In regards to the insurance industry, however, he commented, “Insurance companies are behind the curve on this. Banks are doing it already. Insurance companies are starting to open up to the opportunities but need to do more. Few insurers have taken climate change on board,”
That said, in 2006, the Insurance Working Group (IWG) was set up within UNEP to address current and emerging sustainability issues concerning the global insurance industry. Founding members include Allianz, Axa, Norwich Union, IAG, and HSBS Insurance Brokers.
There is no doubt that the core function of insurance - to transfer risk – does mean that the insurance industry plays a crucial role in mitigating the economic, social and environmental consequences arising from adverse events. This role is particularly evident after major natural catastrophes and man-made disasters.
“Ultimately the IWG believes that its work will help redefine the conventional perception of insurance, from an instrument to transfer risk into a vital tool for sustainable development,” said Bacani.
A recent UNEP FI Climate Change Working Group report, produced a disturbing message that economic losses due to climate change could reach $1trillion in a single year by 2040. “Climate change is now certain, so we must plan for the reality that changes in weather patterns will bring. You just have to see that the financial sector is incurring additional costs from adverse climatic conditions all the time,” Bacani said.
According to Friends of the Earth, in the US, only seven out of 104 insurers listed in New York identify climate change as a relevant risk for their shareholders. But the market does adapt. Recent development have seen the use of alternative risk transfer products to handle more difficult risks, like captive insurance companies for corporate risks, weather derivatives for non-catastrophic variability, and catastrophe bonds for catastrophic risks like earthquake and hurricane.
And this commitment to sustainability is all very well and good for the big international brokers, insurers and reinsurers, but what about the smaller players? “The same applies,” says Bacani.
For Bacani the global growth of environmental business provides an increasing number of new opportunities for insurance companies to do business with green firms and projects. According to figures available in 2004, an estimated $30bn – about one-fifth of total global investment in conventional power sector – was invested in renewable energy. UNEP estimates that within the next decade, this investment will reach $85bn annually.
“Economic volatility and increasing social, environmental and governance legislation means that financial institutions need to take a dynamic attitude to change,” says Bacani.
On a personal note he says, “I enjoy this role because it brings together finance and a commitment to the environment, two of my real passions. And I am internationalist in outlook, so this is very satisfying position in so many ways.”