A wake-up call for everyone

Joachim Faber, member of the administrative board of Allianz Investment Management (AIM), discusses the impact of climate change, the limits of insurability and the opportunities presented by pension funds

Published in Frankfurter Rundschau on December 23, 2011
At the recent environmental conference in Durban, an agreement was reached to establish a new world climate treaty by 2020. Critics think this fight against climate change is taking much too long. The Allianz Group sees an opportunity to use private funds to create more investments in environmental protection. The condition: They must be insured.

Mr. Faber, we want to talk about the global climate. Just what makes this issue so interesting to an insurance company?
Joachim Faber: We have already begun to really feel the impact of climate change in our insurance business. The year of 2011 was another wake-up call for those people who have just not gotten it yet. Sure, we did not experience a mega-disaster that really opened our eyes, something along the lines of a Hurricane Katrina or a forest-fire disaster in Russia.
Nonetheless, insurance companies have never before paid out so much money to cover disaster-related damage caused by so many events, ranging from flooding in Australia in the spring to flooding in Thailand in the fall. The risks and sums are mounting.

Does this pose a threat to your business?
Faber: Not over the short term. But if climate change is not slowed, this could happen. If 100-year storms occur in 10-year cycles, if sea levels rise by more than one-half meter by 2050, if 70 percent of Indians lose their livelihoods because the summer monsoons are delayed, then the limits of insurability will be exceeded.
It is the responsibility of political leaders to quickly address this problem. The recent environmental conference in Durban decided to perhaps get serious about the issue beginning in 2020.
Faber: This would be far too late. I view this very critically. To ensure that the global economy can function in an environmentally conscious way, a ton of CO2 must have a price that flows into the business calculation, and a global emission-trading system for it must be in place by 2020 at the latest.
If we lose a decade before climate protection is addressed on a global level, the introduction of such a market-based system will also be delayed. With each year that we let slip by, the costs of efforts to limit the rise of global warming to 2 degrees Celsius will climb. Every true entrepreneur would act quickly in such a situation.

If political leaders are out of the picture, what can help?
Faber: They are not completely out of the picture. There are some pacesetters, including Germany and the EU. China is also doing a lot. For instance, Beijing is developing a CO2 trading program for several provinces. The biggest barrier is the United States, which refuses to go along and thus provides developing countries with an argument for not agreeing to any internationally required CO2 goals for the moment. I am very pessimistic and do not think this will change soon.

No rescue plan then?
Faber: It does no good to give up hope. One strategy is: The pacesetters must remain active. Europe should decide to cut greenhouse-gas emissions by 30 percent, and not by 20 percent as planned, by 2020 compared with the base year of 1990. This will benefit not just climate protection.
Combined with the right conditions, this would be a powerful and focused economic stimulus program for the entire continent. Such an avowal would be an act of liberation. Investors would then know who is calling the shots and where they could profitably invest their money in new sectors.

But German industry, of all groups, is expressing doubts about the 30 percent goal.
Faber: I am really puzzled about why German businesses and their trade associations do not focus more on the opportunities offered by this approach. Thanks to its pioneering role in renewable energies, Germany is a world leader. There are few sectors about which you can say that. In terms of green energies, the Chinese are hard on our heels, and we will have to really pick up the pace if we do not want to fall behind.

In 2010, investments made in renewable energies around the world hit a new record at 211 billion US dollars. Still, this is not nearly enough to finance the transition to a sustainable energy system and the adaption to climate change. Where could the required huge sums come from?
Faber: The money is there. It just has to be mobilized. Around the world, about 55,000 billion US dollars is currently invested in life insurance and pension funds. If just 1 percent could be activated each year for climate-protection projects, that would be 550 billion US dollars, or five times more than the Green Climate Fund approved by the Durban climate conference is to invest every year in developing countries beginning in 2020.
Many developing countries are demanding that rich countries increase their government development aid in order to fill the climate fund.
Faber: This is not a realistic request – particularly because of the budget squeeze facing many highly indebted industrial countries. This would not bring the necessary money together. The private sector can fill the gap, particularly because the pending projects – wind farms, expansion of the public power grid, storage technologies, energy efficiency – are long range and, as a result, ideally fit into the profile of life insurers and pension funds. For their customers, they need long-term investment options that will produce secure, stable returns.

Nonetheless, only a minute amount of the funds has flowed into climate protection thus far. What must change?
Faber: The key factor is: The investments must be safe. The main job of life insurers is not to save the world. It is to profitably and safely invest the money of their customers so that they can finance their retirement. But it is possible to do both.

How exactly?
Faber: Governments or international development banks, including the World Bank, the Asian Development Bank or the African Development Bank, should issue long-term guarantees for these investments – particularly in developing countries where the willingness to invest has been restricted by rapid changes of government, proclivity to corruption or high inflation. Countries could tax the interest generated by such “climate bonds” at lower rates than that of other investments.
Another key requirement is a purchase guarantee for renewable energies like the one contained in Germany’s Renewable Energies Act. This would mobilize private capital for energy change – and would be much cheaper for a government than if it had to make the necessary investments itself.

What impact are the new “Solvency 2” capital requirements for the financial industry being debated by the EU having on climate investments?
Faber: This is a controversial issue. If the plans currently being discussed are approved, they would strangle investments in climate bonds. The risk capital requirements must be lowered. Otherwise, insurers would be completely eliminated as investors.
With Solvency 2, unrealistic assumptions are being made at times. Under current drafts, for instance, sovereign bonds of an EU member would not have to be covered by any risk capital in the standard model – even though the euro crisis has shown all too clearly that the default risk can be very high. A 30-year infrastructure bond, on the other hand, would have to be backed by 49 percent risk capital. I forecast one thing: The push needed to bring about global energy change will not occur in this way.
The interview was conducted by Joachim Wille.
About Joachim Faber
Until the end of 2011, Joachim Faber was a member of the Board of Management of Allianz SE and Board Chairman of Allianz Global Investors AG. Since 2012, he has been a member of the administrative board of Allianz Investment Management (AIM). AIM handles the investments of Allianz insurance companies worldwide. The lawyer worked at Citicorp in Frankfurt and London before joining Allianz in 1997. Faber has been an active proponent of climate protection and sustainable investments for years. He is a member of the Council of Sustainable Development that advises the German government.  
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