Carbon Pricing Tops Zurich’s COP26 Climate Policy Expectations

Insurer outlines business decarbonisation strategy following net-zero by 2050 commitment.

Government negotiators meeting at COP26 need to provide greater clarity on climate-related policy progress and future commitments in order to accelerate the pace of transition to a net-zero economy, according to a Zurich Insurance Group whitepaper.

The insurer outlined three key areas of focus ahead of the summit: extension of carbon pricing; standardisation of sustainability data; and increased levels of financing and risk taking across the public and private sectors.

“Governments can kickstart the drive to net-zero by working with industry and investors, engaging citizens in the process, and focusing on key policy changes. But without further action, the risks of a disorderly transition, with all the social and economic costs that would involve, will increase. Failure to make progress in the short-term will have consequences for the long-term,” Zurich said.

Putting a price on carbon will incentivise companies to transition to low-carbon solutions for their operations and products, the whitepaper said. In the absence of a global carbon framework, and in order to accelerate the transition, policymakers should commit to expanding existing local and regional cap-and-trade schemes, scaling voluntary markets and furthering the development of carbon single markets between jurisdictions, Zurich added.

The share of global carbon emissions covered by some form of a pricing scheme has risen above 20% for the first time, the whitepaper noted, in particular due to the rollout of a pilot emissions trading system in China. Further, the price of carbon in Europe has almost doubled this year.

G20 finance ministers and central bank governors endorsed the use of carbon pricing mechanisms and incentives during its July communique.

In July, the Voluntary Carbon Market Integrity (VCMI) initiative published guidance outlining best practice, to ensure high-quality claims relating to the voluntary use of carbon credits by companies.

A transparent transition

Zurich also urged policymakers to ensure investors can make investment decisions based on a standardised and “internationally consistent approach to transparency and disclosure”. This will reduce the risk of greenwashing and limit the costs and complexity of ESG-related data, Zurich said.

In an effort to harmonise sustainability disclosure standards across all major jurisdictions, the trustees of the International Financial Reporting Standards (IFRS) Foundation will be launching a new International Sustainability Standards Board (ISSB) in time for COP26.

“Transparency and comparability provided by consistent and credible data on climate sustainability will also help bridge the gap where a clear carbon price might not be available,” the whitepaper added.

Finally, Zurich warned that the investment requirements of a global transition to low-carbon economies demanded both public and private sector support. The insurance group called on governments to catalyse the private financing of transition projects by “taking a share of risk and investing directly to support resilience and adaptation”. In particular, sovereign issuance will be essential to scaling green debt markets, Zurich highlighted.

Policymakers are already moving to rectify this. For example, a third of the EU’s €1.1 trillion 2021-2027 budget has been dedicated to fighting climate change, with a further €750 billion NextGenerationEU stimulus package launched to ensure Europe is “greener, more digital, and more resilient”, Zurich noted.

In the US, President Joe Biden’s bipartisan Infrastructure Bill is intended to commit trillions of dollars to revamping the country’s infrastructure so it is more sustainable.

However, at COP26, policymakers will need to do more to mobilise private sector investment by committing to a “significant level of investment into new technologies, renewable energy, low-carbon fuels, the electricity grid, energy storage capacity, energy efficiency measures, carbon capture innovations, and many other areas”, Zurich noted.

Zurich also published a Climate Change Scorecard which tracks global progress across 12 areas over 12 months, including carbon pricing, legislation; CO2 emissions’ investment, fossil fuel subsidies and electric vehicles. Carbon capture and storage is currently the only area not on track with a 2°C scenario, thus requiring the most short-term investment.

It is expected that several other initiatives, goals and updates will be outlined by financial institutions at COP26, in line with one of the summit’s four pillars: ‘Mobilising Finance’.

Progress closer to home

Zurich also set new climate measures to reduce the firm’s carbon emissions by 40,000 tonnes every year to reach net-zero by 2050.

These include reducing air travel-related emissions by 70% from 2022 compared to pre-pandemic levels, ensuring all communication with customers is fully digital by 2025 (which currently accounts for 80% of the group’s paper consumption) and ensuring all company vehicles are electric or hybrid models with immediate effect, eliminating internal combustion engine vehicles by 2025.

It is also launching the Zurich Carbon Neutral World Equity Fund, a new carbon-neutral investment option for unit-linked life insurance solutions which invests only in low-emission companies.

“The climate crisis calls for urgent action and small steps taken by each of us – individuals, organisations and businesses – will add up to a giant leap over time. Our new measures aim to further reduce our own carbon footprint and, by having a direct impact on how we work, inspire employees, suppliers, customers and others to take action of their own,” said Mario Greco, Zurich Group CEO.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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