Memorandum submitted by the Association
of British Insurers
SUMMARY
The Association of British Insurers (ABI) is
the trade association for Britain's insurance industry. Our 400
member companies provide over 94% of insurance business in the
UK and a sixth of all investment on the London Stock Exchange.
We have also taken a major role in promoting increased investment
and improved management of flood risk in response to climate change,
and as investors, we have argued for improved reporting by companies
on environmental issues.
The ABI believes that macro-economic stability
will only be achieved by ensuring that climate-proofing measures,
which Stern estimates will cost 0.05-0.5% of GDP each year, are
taken in the UK and promoted elsewhere in both the developed and
developing world.
The measures taken by the Government must address
both the causes of climate change and its already inevitable impacts.
Stern considers that whilst mitigation measures can reduce much
of the longer-term risks, "adaptation policy is crucial
for dealing with the unavoidable impacts of climate change, but
has been under-emphasised".[1]
The Government, which has shown considerable international leadership
on mitigation issues, has set out significant plans to address
energy use and emissions in the PBR and its planned legislative
programme. However, we believe that it is failing to tackle adequately
the social and economic impacts of escalating climate risks, for
example, not ensuring that new homes are resilient to changes
in climate and not investing sufficiently in flood and coastal
defences. Policy statements consistently fail to address these
issues despite Stern's warnings.
The ABI supports the Government's market-based
approach to tackling energy use and emissions. But short-term
cost considerations and market failures create barriers to adopting
measures that are cost-effective in the long-term. We support
the Government's conclusion that "climate change is the
most widespread market failure the world has faced".[2]
We believe that the response to such market failure must deploy
a full range of policy measures. The Comprehensive Spending Review
(CSR) and other policy measures should take account of the likelihood
of increased flooding risks and drought.
Any steps taken by the Government should include
proportionate and well targeted regulatory and fiscal instruments
and spending commitments. The right set of policies will enable
UK business to become world leaders in adaptation technologies
in addition to the global role in carbon trading envisaged for
London.
PUTTING STERN
INTO EFFECT
Even if current international plans to reduce
emissions are successful, climate change will continue for some
decades. So we need to take action on adaptation as well as mitigation.
This means action needs to be taken now on land use planning,
resilience and investment. Infrastructure, including housing,
has a long legacy (around 1% of the housing stock turns over each
year) so we need to build houses that are sufficiently weather-proofed
to meet the likely severe weather conditions of 2050 and beyond,
and protect communities with better flood defences.
Britain is one of the few countries where flood
insurance is widely available from the private market. Insurers
want this to continue, but it is dependent on adequate risk management.
Some 570,000 homes are now at high flood risk, compared with the
estimate of 220,000 when current flood defence spending levels
were set in 2002. This is despite considerable recent efforts
to reduce the size of the problem. Expenditure peaked in 2004
and is now falling in real terms—indeed the Government cut
the Environment Agency's flood management budget by £15 million
in 2006.
We need to understand the consequences of climate
change to make informed choices about the future. Policy-makers
should incorporate financial assessments of the impacts of extreme
weather, as well as on average weather, in cost-benefit analyses
of options. As New Orleans witnessed, low probability, high impact
events cannot be ignored.
THE TAX
AND INCENTIVE
REGIME FOR
BIOFUELS
The scale of climate change, together with uncertainties
over the cost-effectiveness of the technological solutions available,
means that a diverse and flexible programme of measures must be
developed. Biofuels should form part of this programme. However,
the infrastructure costs involved in switching from oil limit
the uptake for non-fleet vehicles and for many small businesses
and households. Fiscal incentives should promote blended fuels
(ie existing vehicles being able to use a proportion of biofuels
distributed through the conventional fuel network) as well as
supporting large-scale users investing in their own distribution
networks. Incremental but widely adopted change can make a significant
contribution, particularly where it is not dependent on transition
to new technologies. We are also playing our part and some companies
are encouraging the purchase of environmentally friendly cars
through lower premiums.
THE EFFECTIVENESS
OF REGULATORY
AND INCENTIVE
POLICIES
Increasingly, a number of industries are showing
that efficient markets enable companies and others to respond
to the effects of climate change. Regulatory intervention should
be restricted to those areas where market failures are evident,
for instance because they prevent "public goods" from
being adopted. Where regulation is introduced, business needs
clear, long-term signals of regulatory requirements to ensure
the smooth adoption of higher standards.
The most immediate impact of climate change
is the action of weather on our built environment and infrastructure.
Adaptation measures therefore need to be incorporated at least
as quickly as those designed to mitigate carbon emissions. Mitigation
technologies must also not be adopted if they increase the cost
of repairing after a flood or other bad weather for example cavity
wall insulation in flood areas, or inadequately secured external
cladding or roofing systems, unless adaptation issues are considered
at the same time.
We consider the Code for Sustainable Homes a
missed opportunity as it fails to give sufficient weight to adaptation
measures, has relatively modest mitigation targets and is to be
introduced over a prolonged period. Similarly, the Climate Change
Planning Policy Statement (PPS26) gives too little weight to climate
proofing, even though there are well known technologies available
which are already being used elsewhere. Whilst we applaud the
ambition of achieving carbon neutral homes, we question whether
the incentive offered will ensure a holistic approach is taken
in achieving climate-proof homes. Here again insurance costs,
which must reflect risk, may provide some additional incentive
to owners and occupiers. These "whole life" cost effects
may be of particular importance to low income and key worker households.
COMPANIES' ENVIRONMENTAL
REPORTING REQUIREMENTS
The ABI supports the need for firms to provide
more forward-looking analysis in the enhanced narrative reports
they are required to produce under UK and European Company Law.
The ABI has issued a position paper (enclosed) [not printed]
designed to help companies maximise the value to investors of
the new Business Review, which is required under the European
Accounts Modernisation Directive.
Understanding companies requires more than just
looking at the financial numbers. Narrative reporting has made
great strides forward in the last few years. Institutions welcome
this because it creates an opportunity to take a long-term and
broader perspective on the companies in which they invest. ABI
members want to work with companies to build on this.
Investors would also welcome greater use of
key performance indicators and more information on how boards
of directors oversee the management of material social, environmental
and ethical (SEE) risks. Many companies are starting to incorporate
SEE risks into their mainstream risk management. These should
not be an "add-on" consideration. ABI members would
welcome narrative reporting that sets material SEE risks in the
context of the overall strategic and financial development of
the business. We are currently working to refresh the ABI's "Guidelines
on Socially Responsible Investment", first published in 2001.
OTHER ASPECTS
OF ENVIRONMENTAL
TAX AND
INCENTIVE POLICY
We consider that where employers wish to offer
incentives to promote action by their employees at home, Government
should ensure that there are no fiscal disincentives to action.
Employer funding for micro-renewables or energy efficiency measures
should be non-taxable benefits, analogous to the time-limited
waiver on computer equipment designed to promote the uptake of
IT. Such measures could both reduce the pressure on publicly-funded
grant schemes and assist in the early development of markets,
leading to reduced production and distribution costs as critical
mass is achieved.
January 2007
1 Stern Review: The Economics of Climate Change, 2006. Back
2
Long-term opportunities and challenges for the UK: analysis for
the 2007 CSR, Chapter 7, Pressures on Natural Resources and Global
Climate. Back
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