Insurance sector highlights markets' hidden role in supporting Singapore's carbon pledge

THE Singapore government is considering a range of options to combat climate change, with recent initiatives under consideration including electric harbour boats, planting one million trees by the end of the decade, positioning the city-state as Asia's carbon hub, and establishing a new green finance centre to drive research and nurture talent.

In recent weeks, there has also been mention of a "green credit" scheme for consumers to offset carbon as well as increase hydrogen adoption.

Five years ago, Singapore pledged to reduce its carbon emissions intensity - the amount of greenhouse gasses emitted per dollar of gross domestic product (GDP) - by 36 per cent from 2005 levels by 2030, and to stabilise emissions with the aim of peaking around 2030. Singapore, like many other developed nations around the world, has set ambitious targets under its 2030 pledge. Meeting them will require concerted efforts by the government, businesses, households, and individuals.

INVISIBLE HAND OF THE MARKET

Given Singapore's global reputation as a business-friendly hub, with a commitment to free market capitalism and all the innovation and dynamism that comes with it, it is worth highlighting the somewhat hidden role the insurance sector is playing in reducing carbon emissions.

Specifically, the free market means that insurance companies can offer to underwrite the risk of carbon-emission intensive assets, such as oil, gas or coal assets and related infrastructure for some of the world's largest energy companies - but crucially, they do not have to. On the contrary, due to shareholder and public pressure to deliver more carbon-friendly operations, some of the world's largest insurers, reinsurers, and investment banks are implementing new policies and strategies that will make it more attractive to invest in and insure low-carbon alternatives.

This is by no means a Western-only phenomenon. This change in the funding and insurance of carbon-heavy industries is happening across Asia too - which is unsurprising, given the nature of the globalised insurance system. In fact, many Asian countries continue to be heavily focused on energy infrastructure, and the output of operating fossil-fuel power plants in the region will grow compared to the rest of the world.

SECURING CARBON NEUTRALITY

So, why is this happening and what does it mean for a carbon-neutral future in Singapore and elsewhere? To understand this, we must consider how insurance companies underwrite risk for energy infrastructure around the world.

When an energy company in the oil and gas sector, for example, wants to insure its assets in Asia, it will go to the insurance market for a range of quotes from insurers willing to underwrite those assets. The cost of that insurance, or the conditions attached, will be dictated by free-market factors including competition from other insurers willing to underwrite that risk.

Right now, the market for non-renewable energy infrastructure is entering a longer-term "hard" phase, in which fewer insurers are willing to underwrite the risk on these carbon-producing assets. As a result, insurance policy coverage is increasing in price or coming with increased conditions attached.

Indeed, some of the largest insurers and reinsurers in the world have set hard environmental, social and corporate governance (ESG) targets which will limit how much carbon-heavy asset underwriting they can do in the years ahead.

This is the opposite of a "soft" market in which competition to underwrite risk, such as for wind turbines or solar panels, is high and energy companies can therefore benefit from lower insurance premiums on that infrastructure.

GREEN IS GETTING CHEAPER

On a grand scale and in simple terms, this means the cost of operating and underwriting the risk of carbon-producing traditional energy infrastructure is becoming more expensive, while insuring low carbon alternatives is becoming relatively cheaper.

As capital in free markets flows to areas of lower risk and higher returns, as much as is possible, we are beginning to see a historic shift taking place that will make it more attractive for traditional energy companies to reinvent themselves as "green power" providers.

This is the fascinating yet hidden role the insurance sector, and specifically independent assessors of asset reinstatement costs that work behind the scenes with insurers and asset owners, are playing to reduce global carbon emissions.

As we think about Singapore public policy for reaching carbon-neutral, it is worthwhile to remember the important role capital markets will play in delivering a positive outcome for this agenda.