How Climate Change Can Be Countered through Life Insurance Investments

life insurance investment
Climate change is a dire reality, with deep impact on several aspects of life – and, contrary to popular belief, those aspects touch on more segments of existence than just the ‘environmental’ ones. In other words, not only is this phenomenon posing a threat to the integrity of our planet, its flora, fauna, and weather realities, but it also affects the already afflicted global economy. In the world where climate is changing, it has become a risk for investors to include companies who disregard global warming on their portfolios. Many experts, including those at the Climate Policy Initiative, are choosing to take a different kind of look at this reality and present it as an opportunity for investors.

Institutional investments from life insurers can help drive clean energy

investments from life insurers


The claim such advocates of renewable energy are making is that the world cannot reasonably be expected to transition toward this goal without substantial investments for the long-term. Governments the world over are expected to do their share in terms of low-cost investment, yet, at the same time, many of the world’s economies are still dealing with recovering financial systems, marred by the effects of the recession. As such, one potential solution is to turn to institutional investors for input into clean energy alternatives. That’s actually the topic of a recent report, published in 2013 by the Global Investor Coalition on Climate Change, a global institutional investment group that handles some $22 trillion in assets and supports the Climate Policy Initiative.

The report looked at the investment opportunities for pension funds and life insurance companies into clean energy. They found several challenges in this respect, most of which had to do with an excess of public policy barriers, as well as a shortage of attractive investment opportunities. Attractiveness was judged in terms of risk levels and pricing/returns ratio and it was established that investing into renewable energies is particularly suitable for institutions whose risk/return requirements favored long-term approaches, lower returns and, in turn, lower prices. In looking at potential investment opportunities, the report identified three distinct channels, which can take the form of loans or bonds, as well as equity and company shares.

 

  • Corporate investment. The reports’ authors acknowledged that this channel could prove the easiest investment path for institutions. Their conclusion was that institutions can provide corporations with the amount of equity and debt they would need to fund renewable energy projects for the coming 25 years. However, they also explained that corporations tend to articulate their energy policies in accordance with their own strategies and goals. There were also relatively few companies out there on the market, at the time the report was written, which focused strictly on renewable energy. As such, it’s unlikely, the report concludes, that institutional investment could do much to change corporate attitudes toward funding renewable energy projects and, in turn, lowering the price of clean energy. 
  • Direct investment. For most institutions (or at least most of those that came under the scope of the report discussed here) direct investment is a complicated option. It requires specialized skills and expertise, and also comes across as largely liquid. In other words, institutions would likely limit their investment to a handful of major companies and they would have a hard time selling off assets at minimal value losses, in times of liquidity needs. The institutions in question, as per the report’s authors, could only provide about a quarter of the equity investment required to fund such renewable energy projects until 2035. However, direct investment does have the potential to lower the cost of such projects, as well as to ‘teach’ the institutions involved how to make the most of their risk-adjusted returns. 
  • Investment funds. Pooled investment funds could turn out to be larger and less liquidity-constraining than direct investment options. However, just like with corporate investment, the link they come with an underlying risk: that of a reduced connection between the money invested by life insurers and pension funds and hands-on projects for encouraging renewable energy projects. Some institutions, the report highlights, have thus far been concerned about the uncertainty of cash flows that pooled investment funds offer and would rather adopt “buy and hold to maturity” fund designs, which are more predictable in terms of cash flow.

Can you, should you invest into renewable energies?

invest into renewable energies


That being said, while institutions have some alternatives at their disposal, what of personal finance investments? It goes without saying that permanent life insurance is a useful investment tool – you can find out more about its cash value right here. It pays to choose your insurer based on the value of the guaranteed interest rate, while also bearing in mind that stronger companies will generally start paying dividends into their permanent policies after a period of two years. And some insurers offer special solutions geared toward new technology risks, which help promote the development and propagation of clean energy sources. One of them, for instance, offers special protection against investment risks in offshore wind technologies, warranties for solar cells, as well as exploration risk insurance for geothermal energies!

Yet, unfortunately, the future-focused mindset described below is the exception, not the norm. According to the results of a recent poll, as much as 61 per cent of the pension and life insurance funds they surveyed offered no option to invest into the infrastructure of renewable energy projects. Industry expectations remain somewhat optimistic, with allotment to renewable energy forecasted to grow massively over the coming three years. That was the response of almost one third of the pension fund and insurer representatives questioned – while 15% actually forecasted growth by over 10%. For the time being, it seems that pension fund and life insurance investors are most attracted by on-shore wind powered energy, but the consensus is that there’s a lot still to be done, before such investments become truly attractive. Many such institutions pleaded for more predictable support from the government, as well as more in-house knowledge within the sector, if investments in this field are expected to grow.

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