By Toby Vallance
|Published 05 November 2021
One of the UK Prime Minister’s ambitious pledges in the run-up to COP26 was to consign coal to history and yesterday was the key opportunity at the conference to make that happen.
There was progress, with various fresh commitments which certainly point the way to significant reductions in the consumption of coal and other highly polluting fossil fuels but they fall short of eliminating coal from the world’s energy generation. That will have to wait for a future COP.
The headlines yesterday were full of different numbers of countries that had committed to different things.
The biggest number, 190, was of those countries that signed up to a broad set of objectives in the ‘Global Coal to Clean Power Transition Statement’. This includes 23 countries committing for the first time to phase out and not build or invest in new coal power, including Indonesia, South Korea, Poland, Vietnam, and Chile. It commits nations across the world to:
Some of the biggest coal producers and users, including Australia, India, the USA and China, were among a handful of countries that did not support this pledge. However, China and the USA have indicated their intention to stop overseas investment in new coal plants.
The world's largest alliance for phasing out coal gained 28 new members. Chile and Singapore were among the nations to join the Powering Past Coal Alliance, which is co-chaired by the UK and Canada.
A much smaller group of 25 countries, including the UK, USA, New Zealand, Canada and several European countries, agreed a more specific set of objectives on phasing out dependence on other fossil fuels, including oil and gas.
As these bold pledges are turned into actions, the insurance industry will find itself increasingly exposed to a range of transition risks.
The objectives set out by COP will give more ammunition to climate change campaigners looking to hold fossil fuel businesses to account. They will likely find themselves facing increased climate change litigation claims for damages, as well as claims by climate activist groups seeking the application of stricter emissions targets. The Royal Dutch Shell claim in the Netherlands sets a precedent for such actions. Connected with this will be the associated ESG disclosure requirements, creating a potential D&O exposure, as big energy companies struggle to hit tougher green metrics.
Insurers are also going to have to develop new expertise and capacity in renewable energy with an anticipated surge in demand for cover for a wide range of new risks, some of which have little or no meaningful claims history.
Transition risks will also rear their head in investment portfolios, according to research published yesterday in Nature by Jean-Francois Mercure of the University of Exeter.
He warns of the danger of holding onto once blue-chip assets as demand for the energy generated by them falls. As this happens, firms will walk away from the most expensive fuels to extract.
Mercure’s warning is stark: “In a worst-case scenario, people will keep investing in fossil fuels until suddenly the demand they expected does not materialise and they realise that what they own is worthless. Then we could see a financial crisis on the scale of 2008”.
In all, yesterday saw fresh commitments and real progress. However, the transitional journey will be especially hard for the oil and gas industry, requiring serious consideration by insurers and everyone else involved in the process as to how this can best be managed and achieved.
