The Triple Bottom Line Blog

Ceres has issued a noteworthy report about how the insurance industry is responding to the risk of climate change. Follow the link for plenty of detail, as well as another link that lets you download the entire document, but here is the elevator-talk version of the report from the Ceres website:

Hundreds of new insurance initiatives, including 'green' building credits, drought-protection in developing countries and incentives for investing in renewable energy and carbon emissions trading are being offered to tackle climate change and rising weather-related losses in the U.S. and globally, according to a major new report announced today at the annual conference of the International Association of Insurance Supervisors.

The report, commissioned by the nonprofit group Ceres, outlines more than 400 climate-related activities in the US and abroad--double the number of products and services identified in a similar report done just 14 months ago.

Intriguingly enough, blogger Joel Makower (whose work we've often had occasion to cite) was forecasting just this trend almost two years ago. Noting a couple of early insurance-industry moves that have proven to be a harbinger of more sweeping changes, Makower commented:

If government policies won't lead to aggressive action on climate change, maybe the insurance industry will. . . . The message is implicit, if not explicit: "If you don't care enough about the risks to your company resulting from severe climate change, we just might not insure you."

Insurance companies occupy an interesting place in our free-enterprise system. As middlemen of risk, they consolidate the financial risks to which thousands of companies (as well as millions of individuals) are exposed. By undertaking risks that would otherwise ruin a random sampling of firms and spreading the costs over a much broader base, they make it possible for injured companies to remain in business, supported (in effect) by contributions from thousands of other firms. One might almost call it a kind of "free-market socialism," created not by government but by private companies for their own economic benefit.

And because of this quasi-social role, insurance companies also play a quasi-regulatory role, developing and enforcing standards of behavior that constrain organizations almost as powerfully as laws might do. In some areas, we take this for granted--for instance, with the product-safety standards established by Underwriters Laboratories, which were founded in 1894 by an insurance company executive. Now this role is being extended into the climate-change arena. A few examples, offered by Ceres, related to auto use:

Pay-as-you-drive (PAYD) insurance products are now being offered by 19 insurers worldwide, who recognize that reduced driving means reduced accident risk, as well as reduced energy use. Tests have shown that PAYD products can reduce overall miles driven by 10-15 percent or more. About 20 percent of new customers of the French insurer AGF have elected the PAYD option, with 250,000 such policies in force. Progressive and GMAC offer PAYD policies in parts of the U.S. Japan's Sompo Insurance has given premium discounts to 3.25 million policyholders that drive low-emitting cars, and Tokio Marine and Nichido have signed up 6.23 million policyholders, 48 percent of its total auto policy customer base, who are receiving discounts for driving low-mileage or low-emitting vehicles.

It's extremely difficult to change human behavior through mere exhortation. And getting laws passed that constrain individual activities without a clear and immediate payoff can be almost as difficult, as stagnating CAFE standards in the US suggest.

But insurance companies may now be stepping into the breach. By pooling and monetizing "externalities" like the environmental risks associated with driving, and then giving insurance customers clear and easy ways of reducing their own share of those risks, they are beginning to reshape human behavior more subtly and painlessly than any government edict.

And making a profit doing it. Ah, the genius of capitalism!

Labels: CERES, Finance and Investment, insurance industry, Joel Makower

The bar is getting set higher and higher when it comes to triple bottom line performance. Whether industries are seeking to avoid onerous regulation or just trying to beat the competition, the drive towards sustainabilty will surely increase.

One strategy that is indicated here is to get into partnership with government. Almost every federal and state regulatory body now invites companies to work with them on a voluntary basis to find better ways to do business. There is no better way to "stay in the loop" when it comes to the likely course of future regulation than to establish strong personal and business connections with the regulators in your industry. It also might put you in the catbird seat when it comes to influencing the course of new requirements.

Partnering with NGOs is another way to both foresee and influence future developments. Companies that have been working with CERES, for example, are plugged in to what the future may hold regading climate-change regulation and how a wide range of NGOs is trying to influence those outcomes.

The very best approach, when it's possible, is to get involved in a project with government and NGOs that offers positive business outcomes for your company or industry. Such projects can be time-consuming and difficult, but read Chapter 7 of our book The Triple Bottom Line to see how they can lead to gigantic win-win-win situations.

In that chapter, we describe how the utility company PPL, the government, and the stakeholders on the Penobscot River in Maine all benefited from an environmental deal that PPL helped create. Rather than waiting to be forced by the government to tear down some dams to protect endangered salmon, PPL negotiated a deal to allow the NGOs to buy two dams for $25 million, which they will then decommission. In return, PPL gets federal approval to replace the lost power and revenues by increasing flows over its remaining dams.

Talk about a sweet spot!

Labels: CERES, Penobscot River, PPL, Role of Government, The Triple Bottom Line