Oil industry needs to stay engaged in climate change debate
The CEO of Munich Re, Joachim Wenning, announced in a guest editorial in the German daily newspaper Frankfurter Allgemeine Zeitung on Monday that his reinsurance company would no longer support or re-insure coal.
This means companies that gain 30 percent or more of their earnings from coal mining or trading and even infrastructure predominantly used by coal such as some ports.
Wenning explained that the move showed Munich Re’s desire to be compliant with the COP 21 Paris Agreement on Climate Change and its goal to limit global warming to 2 degrees Celsius. He labelled coal as the fuel source emitting the most CO2 and hence one of the main culprits for global warming.
He argued that there was a strong business rationale behind the move in that climate change brought about erratic weather patterns and risks of natural disasters such as hurricanes, and the re-insurance industry had to pick up the big tab at the end.
This was particularly significant because Munich Re is the world’s largest re-insurer. Wenning is not alone, though. Swiss Re made a similar announcement earlier and several insurance companies such as Axa and Zurich have already taken similar measures or are about to embark on a similar course.
Insurance and re-insurance companies are particularly pertinent when it comes to the climate change debate. It is virtually impossible for most companies to do business without appropriate insurance cover. It is virtually impossible for big insurers to underwrite risk without the security blanket provided by the reinsurers. (Some large companies feel at times that they are sufficiently large and their business is sufficiently diverse and geographically dispersed that they can save on the premium and self-insure. BP was such a company, and then the unthinkable happened: The blowout of the Macondo well in the Gulf of Mexico, which became known as the Deepwater horizon incident. In the end, being self-insured became a hugely expensive proposition for the company.)
Insurance companies are also major asset managers and investors, as they need to invest the proceeds of the premiums wisely. Their portfolio managers will not deviate from the edicts of the company’s insurance arm.
In recent years we have seen increasing numbers of asset managers refraining from investing in coal. Retail investors are also flocking to invest in climate change funds, instruments with environmentally friendly investment strategies, ethical funds and other forms of “impact investing.” Norway’s Sovereign Wealth Fund went one further: not only does it shun coal but it also stays away from investing in oil companies and oil-related industries. Part of the motivation behind that move is certainly political correctness; part of it is also diversification. Norway’s wealth is largely founded on oil, so investing in the same commodity may represent an excessive risk concentration.
It will be important for the oil industry to stay engaged in the climate change debate and to be seen as “getting the message”
In many ways the smaller environmental funds and their attractiveness particularly to retail investors were the canaries in the mine, for where public opinion goes industry will follow. Investment is the lifeblood of any economic activity. Insurance is its enabler and the guarantor of prudent management, in case things go wrong. In that sense the going gets really tough for any industry when insurance companies walk away. In the case of Munich Re, which has a $50 billion business, this was an easy decision to make. It will not affect the business model of the company, but it will have an impact on the coal industry.
The underlying trend goes toward environmentally friendly sources of energy. Where coal goes, oil often follows in the climate change debate. We have seen this with Norway’s Sovereign Wealth fund. In that sense it will be important for the oil industry to stay engaged in the climate change debate and to be seen as “getting the message.”
These big decisions by major companies such as Munich Re are driven by a concern about how climate change will affect their business. The fact that such decisions go down well with the investors’ community is even more helpful. Climate change is real and poses real risks. It is also a highly emotional debate, which means that industries that are seen as “polluting” need to stay engaged and ahead of the curve.
The world will need fossil fuels in the future. Oil demand is expected to grow in line with a growing populating until 2035 or even 2040. The International Energy Agency foresees an increase in global oil consumption of 1.5 million barrels per day (bpd) this year and 1.3 million bpd next. As long as the freight and transport sectors depend heavily on oil, it has a forseeable future.
This does not mean that one can forget the sphere of public relations. Because if one does, investment may become harder to come by. An industry that is underinvested in would do well to heed that call. This debate has huge ramifications for most GCC countries, which are among the biggest oil producers and their economies are still dependent on the “black stuff.” The question being: Is coal the canary in the mine?
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources