Our banks, insurers and asset managers will assume significant scale with growing penetration. There could not be a better timing to align individual lifestyles and aspirations with the country’s sustainability goals as well as those of all financial institutions…
Walter Murphy and Praveen Gupta in conversation on the Preventable Surprises blog. Preventable Surprises, to quote them, is a London based ‘think-do’ tank that seeks to drive behaviour change within the investment sector to help prevent major market dysfunctions. In an increasingly complex and polarised world, Preventable Surprises creates a safe and creative space where ‘positive mavericks’ inside the investment system, scientists, policy experts and corporates can collaborate. The outcome is lasting change that benefits investors and corporates that have a long-term focus and thus society at large. Their major programme focuses on climate related systemic risk and is called ‘Forceful Stewardship’. They are also engaged in work relating to ESG leadership, sell side research and investment scenarios:
Externalities are fascinating. Perhaps a bit too daunting for the imagination of bean counters. It is not just the accountants that I am alluding to but the actuaries, rank & file and the risk managers. Economists included. The provocation for the latter comes from Inside Out Economics: Are Externalities the Main Event? (by Duncan Austin) and so does much of the (‘beyond)meat’ to reinforce my conviction.
If risk-management is indeed meant to make governance robust – the function ought to shed its myopia. ‘Tell us more’ said the chairman of a risk committee in response to my choice of the phrase. So, I alluded to Nassim Taleb’s ‘hindsight bias’ followed by a case for liberal arts education as an antidote to myopia. Coz bean counters, I said to him, left to themselves are a risk to the risk function!
How do we de-risk our businesses to ensure their sustainability as well as our planet’s? In response to US treasury secretary Steven Mnuchin’s suggestion that the champion of Climate Change – Greta Thunberg – must study economics, the author Duncan Austin has something specific to say. “Yet possibly what Greta has noticed is that many of society’s influential decision-makers are either formally trained or well-practiced in economic thinking and still struggling to find convincing remedies to our sustainability crisis. Perhaps the way we have been teaching economics is part of the problem?”.
While the author does not undermine the role of economics as a valuable body of knowledge – he bemoans “downplaying the significance of one of its own discoveries made exactly a century ago” which “has potentially calamitous real-world consequences”. To get under the skin of this hard hitting truth – everyone word in the following quoted text must be read.
“Pigou’s inconvenient truth
In 1920, Arthur Pigou, a Cambridge economist, conceived the idea of externalities to describe how market transactions may create unintended harms or benefits for which no monetary compensation or reward occurs.
For example, one study estimated the monetary value of the ‘services’ provided free by the Earth’s ecosystem at $125 trillion in 2011, nearly twice the value of global GDP (gross domestic product). That is just an estimate of certain ecological values ignored by the market. Important social values are missed as well. In the UK, unpaid housework in 2016 was estimated at about 65 percent of GDP – another huge block of nonmarket value. These two studies alone indicate that measured GDP captures about a third of some larger conception of value.
Such estimates suggest that it is not that the market doesn’t capture all things of value, it doesn’t even capture most things of value. Far from externalities being peripheral, they may be the main event!
We have a sustainability challenge because the entire financial system repeats the problem of the discredited EBITDA metric at the level of the whole economy. This is the invisible conceptual cage we have wrapped around our decision-making and from within which the ESG movement is frantically trying to make a difference. Alas, given the incompleteness of our markets, the ESG movement increasingly resembles a hopeful grafting of good intentions onto an unchallenged accounting reality that remains the largely intact source of our problems.
So, every single financial metric on the Bloomberg screen is a BESDA (‘before ecological and social depreciation and amortization’ basis) metric – profits-BESDA, earnings per share-BESDA, return on capital-BESDA, return on equity-BESDA, etc. The millions of financial numbers processed daily by our increasingly automated markets – which, in turn, steer our economy and drag our culture along behind, ripping up nature in its wake – are all BESDA numbers. It might not only be EBITDA with which we’re conning ourselves, but every financial number in the book. They all represent different degrees of disembedded value, some of which we have unmasked, some of which we have not.”
How does all this tie in with insurance economics?
Let us leave aside the logic or illogic of pricing models, the adequacy or inadequacy of the time frames in which they are expected to operate and the obsession with predictability. Asbestosis by hindsight looks very probable (as Mr Taleb would put it) but the shortsightedness which brought upon all the attendant woes – meant you were collecting too little a premium and something unforeseeable was beyond your imagination. It would be interesting to dig into actuarial signoffs. A formal risk management function was absent, but someone was responsible for something akin. Underwriting profitability – then as it is now – takes a back seat. Lloyd’s almost went broke. Pricing continues to be a mockery, thanks to the seemingly endless supply of ‘alternate capital’.
Climate Change is not a peril priced for. Together with Cyber and aspects of D&I, these three externalities – constitute biggest of the risks. Too far and out of their boxes. Valuation of insurance entities is an addiction that generally induces the insurance industry to gloss over a sustainable price. Many covers like motor third party (GHG / health consequences), pollution and contamination would not pass the sustainability test for not only these run counter to the risk carriers’ sustainability but more importantly our Planet’s too. When car sales fall (including diesel fuelled) insurers panic as their auto portfolio shrinks – not for a moment is there a sense of rejoice that there could be resultant reduction in emissions meaning less impact on the health of those who end up inhaling it.
Is there some unintended good? From outside the blinkers of all concerned arrived – what I like to call Post Millennials – they are not meek, and shall inherit the earth. It is very much in our interest that they join the shareholder activism – cut through the bureaucratic barricades, recharge the imaginations of all those in serious need of getting externalities inside the pricing models! An art of liberating all forms of bean counting…
As urban spaces expand – many historical, architectural and natural sites of significance fall by the wayside. Increasingly neglected, into disrepair and struggling to survive. Charming Udaipur seems headed in this direction, too.
While I am finalising my presentation Climate Change: Elephant in the Boardroom! for the Insurance Law Association, I am equally engrossed in Raavan. The gripping fiction by Amish Tripathi, based on the Lankan king, devil incarnate in the Ramayana. With the story unfolding, I begin to believe that this Lord of evil is the polluter, pollutant and pollution – the unholy trinity! And that a single deviant can radically vitiate the overall climate.
To be the last speaker of the day calls for extra vitality both in terms of what you wish to present and how. Therefore, nothing like fortifying the narrative with real stories. Sometimes, what others tell you lends a whiff of oxygen. And sometimes what you have said something – somewhere else – gives a new context to your fresh explorations. Most interestingly it’s what an another might tell you without even having to ask, after you have delivered your story, that triggers a new insight.
How about the last thing first? So, at my presentation I seriously fret and fume about everything that is going wrong with our lovely Planet. Coal, the king of fossil fuel and blackest of them all, is at the very epicentre of the trouble! Once I am all done and settle down for an Uber ride home – I am wishing to cool down. Expecting it to be a quiet trip. However, the driver Rahul has other plans.
That he is from some place called Deoghar, by the Mayurakshi river, in Jharkhand is an inert input. Given my equally inert response – it is his turn to lace it up. ‘That’s where Raavan left behind the Shivalinga’ was something I was least expecting to come my way. He then tops it by saying how coal is abundant and virtually free around Deoghar. Not surprised by the fact that it is right in the heart of India’s coal belt. Not too far apart Jharia where fires have been raging for over 100 years, like uncontrolled demons, in the coal pits. Free and plentiful supply makes it a darling and an addiction. Leaves me wondering whether he can read my mind or was he present at the just concluded event, that evening?!
Late 2017 I ‘crystal ball gazed’, to write a blog on invitation from the CII (A leaf from the Chartered Insurance Institute Blog!), as to what lay in store for 2018. One trend that I talked about was the non-state players taking on the role of influencers. Emerging charisma of individuals was in mind too – particularly Sian Fisher (CEO of the CII) in context of her inspiring ‘HeForShe’ initiative. That was how far I could think at that point of time. Greta Thunberg was nowhere in sight. Perhaps just a fourteen year old then. Early last year at the Asianinvestor panel discussion on megatrends, in Hong Kong, the context of leadership evolved and I dared to say that ‘Post Millennials’ like Greta should be sitting on the boards of corporations. Howsoever, naïve it might still sound, the urgency to cut on our carbon footprint calls for Raavan-of-a-Climate-Crisis slayer like Greta.
With the rising sea level much of Mumbai will be under water by 2050 – I tell my friend quoting New York Times. This is before the local media breaks the story, a few days ahead of my presentation. I am surprised that he is not surprised and tells me what his late grandmother said. Lending more than a whiff of oxygen. The paternal grandma used to attend to the needs of a spiritual lady one Shantabai. Sometime between 1925 to 1941 – during her spiritual journey – the name Ramtanu was bestowed upon her. Shantabai visualised a great city emerging from the Sea, where Navi Mumbai stands today. More importantly, she also told the grandmother that in about 100 years the sea would claim the city back! In Turbhe (once a village), now a suburb of Navi Mumbai, stands a temple dedicated to Ramtanu that is believed to protect all its residents.
There are signals galore! Are we willing to be not distracted by the noise? Uncanny or uncanny not?!
Published in Business Standard on December 28, 2019: https://www.business-standard.com/article/current-affairs/the-crucial-role-of-banks-and-insurers-in-reducing-greenhouse-gas-emissions-119122800822_1.html (Paywall)
2020 will not be yet another new year! With it commences the countdown to 2030 by when together we must all – individuals and businesses – work towards achieving the expectations set by the Paris Climate Agreement. Insurers have not only been generally slow in waking up to this challenge, but many continue to ‘aid and abet’ the Climate Crisis. The growing role of Asia in global economy, higher propensity to natural catastrophes and an aging society – makes it more vulnerable to Climate Crisis than any other geography.
As an inspiring leader, Sian Fisher, CEO, Chartered Insurance Institute, has demonstrated how the insurance industry can successfully lead the financial services in the Diversity & Inclusivity space. In this interview, Sian shares her vision on dealing with Climate Change, how some of the European players are already leading the way, a transitioning protocol to mitigate the carbon trail and some of the pathbreaking work undertaken by the Chartered Insurance Institute. (Also published on the CII blog).
PG: How could and should insurers and reinsurers influence businesses responsible for carbon emissions?
SF: There are four key ways in which insurers can influence carbon emissions:
Most importantly, insurers can help organisations look at risks in a holistic way, advising them on how they can manage climate risks and manage reputational, regulatory, legal, technological and physical risks. As a member of the organisation Climatewise, we have sponsored guidance on a ‘Transition Risk Framework’ for use by our members:
Second, during the underwriting process, insurers can look at the total risks of a project, including the potential reputational and regulatory risks of activities that result in high carbon emissions, and factor this into pricing. However, it is more effective to have a dialogue with clients before the underwriting process, either between the insurer and the client, or between the broker and the client, about managing the risk, rather than waiting for the pricing stage of the process, when decisions may have already been taken that may not be able to be reversed. We should also remember that pricing decisions can work in different ways. For example, timber-framed buildings are attractive from a carbon point of view, but can be more vulnerable to fire in the construction stages, and if they are not maintained properly. As always, it is important to look at all the risks of a project, and not just one aspect.
Third, insurers can approach the way they invest their funds in a way that is sustainable from a carbon point of view, as Zurich, Aviva and many other insurers have done:
https://www.aviva.com/social-purpose/responsible-investment/
Fourth, during the claims process, insurers can help repair and rebuild so that replacement structures are more carbon efficient.
PG: Increasingly, more and more European insurers and reinsurers are moving away from investing in fossil fuels. Would you expect this to be replicated globally?
SF: Yes, there are strong reasons for moving away from fossil fuels in terms of avoiding reputational or legal risks. In future, it is likely that governments will develop more financial incentives to encourage investment in and use of renewable energy rather than fossil fuels, so in the long term this does make sense.
PG: Do you see room for Climate Change as a standalone subject in insurance and risk management syllabi?
SF: Many people think of the CII and think of exams straight away, but people tend to take exams early in their career, and then look for a wider range on ongoing materials and training to keep their knowledge up to date. As a result, we would like to integrate climate change into many of our syllabi (as we already do, for example for investment advisers) and then offer tailored materials and CPD, such as the Transition Risk Framework to members. That way, we can reach all our members, and not only the ones that are in the exam phase of their professional development.
We would like to integrate climate change into many of our syllabi (as we already do, for example for investment advisers) and then offer tailored materials and CPD, such as the Transition Risk Framework to members.
PG: In your view, is there a role for insurers in transitioning societies towards a carbon neutral existence?
SF: Yes, insurers exist to help individuals, families and organisations to manage risk. Climate change is one of the biggest risks we face, so insurers naturally have a huge role to play in helping society manage it.
PG: Many thanks. Here is wishing you Merry Christmas and A Happy New Year!
Once-upon-a-time orchards of Powai, in Mumbai, are a concrete jungle now! These langurs (Semnopithecus) – original ‘denizens’ are becoming frequent visitors – who somehow manage to cross the busy JVLR (Jogeshwari Vikhroli Link Road) from wooded IIT Bombay. Like they did earlier today! Probably their kingdom extends from Aarey to the Sanjay Gandhi National Park. Not sure what is pushing them this way. Could it be encroachments, shrinking green cover, are they multiplying too fast? Food or fun? Unlike the leopards – perhaps both!
A short story resurfaces after nearly 25 years: ‘Reincarnated’ as a Cli-Fi!
The roaring thunder, lashing rains and strong gales that engulfed the Territory were as always labelled a typhoon. Bearing a name in the usual alphabetic order. Not one person in or around heard the invocation of Saa Yue – the great shark spirit, who for thousand of centuries had ruled the South China Sea. Ages before man set foot on the neighbouring lands. Today It was furious and venting out the steam that had been long building up. Here was a specie that they had looked upon very kindly. The human was now turning out to be not only a threat to the Saa Yue or the specie itself – but the entire planet.
The great spirit had witnessed a slow spread and steady multiplication of homo-sapiens along the coastlines. Like any other plant and creature, It philosophised, they too would eventually merge harmoniously in the grand design.
But adapt, It began to realise, was an understatement for this creation. The great one had seen evolution unfold ever since its own arrival. And was amused by the suggestion of marine life going overland and even becoming arboreal. To the arrival of the naked ape! He dressed up in no time. Initially depended largely on the vast expanse of water, for his food. Then discovered cultivation. Made fire. Came back to the sea with means for larger catches. Planks transformed into big and bigger boats. Never till then he dare dare a shark.
And how did the Saa Yue feel about being left out of the Noah’s Ark?
No big deal. We have survived the worst of deluges. We do not even see global warming as any real threat to us!
While the mastery of the waterways brought wars, piracy and worst forms of deceit, it also enabled the great seers and masters to travel to and fro.
We were one of the first to hear profound ideas and divine teachings before they could reach faraway lands. We guarded the vessels in this part of the world. Be it Fa Xian, Xuan Cang or St Francis Xavier and all those names that your world would never know. We were with them when the seas were rough and heavens harsh. Their test was ours.
What did we gain?
They heard with all humility, our confessions and anxieties.
Oh, great souls we prey on smaller creatures, we said.
Ah! They had a very reassuring reply. Ever heard of ‘matsyanyaya’? In short, the big fish eat the small fish. And thou are but a part of such a supreme will.
Thou art a martial class of the oceans. Kshatriya, Samurai, Mandarin – whatever thy may wish to call thyself.
Protect thy territories. Do not attack unless provoked. And do not kill meaninglessly.
The early fishermen set out to fish seeking blessings of Goddess Tin Hau. They worked hard and caught only as much as their needs. We admired the heroism of the hunter and hunted, in The Old Man And The Sea. The sharks were never known for Moby Dick kind of blubber. The greed of human harpoons was, therefore, first aimed at the poor whales.
The march of history took a devious turn. Man made deadlier fishing equipment, bigger ships, longer reach. Stronger armies and more unfortunate wars. The sailing boats were eventually fossil fuelled. Damaging the world around us. All we do after a meal is leave behind oxygen rich crimson red hue. We never came to understand the stealthy submarines. The nylon nets endanger our young and weak ones.
We often wonder – where are the great men who gave us the wisdom.
Is it true that they had become recluses on high mountains? Why?
We do not understand why men push the frontiers of land further and farther into the seas. Dumping rocks and concrete fill. Out pop more and more ‘termite hills. What also baffles is the term land shark! If that is an analogy to any of our 340 types – it is adding insult to injury.
You painted the snouts of your warplanes with our mock look alike. And Peter Benchley tainted us as the man-eater around the Amity Island, in his Universal Studio ‘Epic’. You all say; the only good shark is a dead shark. How ridiculous. You call us by all funny names; jagged toothed one, killing machines, Chondrichthyes et al. You overlook the majestic perfect grace of a shark in natural surroundings. Our bloody pictures outside water indeed look grotesque.
Your portrayal of us as a fierce uncontrolled force has only imprinted deep terror in human souls. More men get killed by your funny motor cars. More men kill men. And more sharks get attacked by men than men by sharks.
Do you think a P.R. firm could do us any good? We would certainly like to get rid of our worse than Godzilla image. Sharkie is a comic attempt, but not good enough. Maybe, something on lines of the Jungle Book or Pocahontas!
You hunt our brethren to go into your supper bowls as shark fin soup. Tell us, how would you feel if you were us. First be hunted. Then smell the putrefied remains of such soup dumped back into the seas. With all that continuous filthy discharge.
Aren’t we all here to live together?
Our martial sense possesses us. Your sight is a provocation to most of our breed. One shark attack and out pop your several beware signs. For every attack you plunge into the cyberspace to explore where and when was the last one reported. Your think tanks tinker hard for reasons. You hire mercenaries to liquidate us.
We share more secrets on your origins than Darwin could ever unravel. We know much more about you than what Cousteau or the likes could fathom about us.
Come on, said the mighty Saa Yue, as It whipped the waters of South China Sea.
From the strong sinuous movements rose big waves, winds and the froth. Enveloping the skies and lands around. And up went the number eight signal.
Give us a chance. We are sure you can survive and flourish without the soup. And prove your masculinity without having to kill us.
Come on, come on … .
Courtesy Dan Bloom@ https://northwardho.blogspot.com/2019/12/an-appeal-short-story-by-praveen-gupta.html
The Diversity Blog 