ABI proposes changes to unlock billion for green investment

The Association of British Insurers (ABI) has proposed data and financial changes that could unlock billions of pounds for green investments.

A number of barriers currently block increases in investment in projects such as renewable energy, which reduce the impact of climate change, and are known as Environmental, Social and Governance assets (ESG).

ABI said UK insurers alone hold over £1.8 trillion in invested assets, with trillions more managed by investment firms and banks. But, the sector body said, only around 1.2 percent of all managed UK assets are invested in green projects.

A major barrier to increased investment is the lack of high-quality and consistent ESG data in the financial system, which makes it difficult for investors to manage their exposure or identify the best opportunities to invest in, ABI said.

In addition, the current prudential regime for insurers doesn’t adequately reflect the long-term nature of insurance because it focuses on a one-year solvency measure. Therefore, the Solvency II rules effectively disincentivise insurers from long-term, sustainable projects, ABI said.

To address this, ABI has proposed key measures in a consultation response to the Prudential Regulation Authority as well as backing proposed FCA guidance to increase the consistency and comparability of financial date related to climate change.

ABI has proposed that the regulators use their role to help improve the availability and consistency of data relating to the firms and initiatives insurers may want to invest in. This will create a wave of change rather than the slower “piecemeal” approach where individual insurers develop their own methods.

ABI has also proposed that regulators do more to take sustainability factors into account when considering assets. The body said this will make the most of the good match between longer-term investments and insurers long-term liabilities. It said that enabling this should be a key focus of the Solvency II 2020 review. It is something the UK could do independently once the country leaves the EU, ABI added.

Steven Findlay, head of prudential regulation at ABI, said:

“Insurers are more aware than most of the increasing threat posed by climate change, given they are in the business of identifying future risks and working out how best to mitigate them. When extreme weather events happen, they are at the forefront of picking up the pieces. As a sector which holds over £1.8 trillion in invested assets, they are also in a unique position to be able to seriously boost new, greener technologies and energies. They want to be able to do more of this, and it is very encouraging that the PRA shares these goals.

“Moving our world towards a lower carbon economy is in the interests of everyone, which is why we are setting out some steps to help unlock billions of pounds of investment for innovative, greener projects. But we have to be practical about what will make a difference. Those responsible for managing assets need to be able to demonstrate to their boards and their shareholders that greener investments are good for their balance sheet, not only the planet. The industry, through initiatives like the recent ClimateWise Transition Risk Framework, is already taking positive action; regulatory changes to give insurers more freedom to invest in sustainable assets would also be a step in the right direction.”

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