SINGAPORE - Singapore’s central bank is working on a pilot scheme to help insurers make investments in sustainability-related infrastructure projects in Asia.

The scheme aims to enhance insurers’ familiarity and comfort with infrastructure investments.

It will test elements such as risk guard rails, risk-appropriate regulatory treatment and capability-building facilities, said Deputy Prime Minister and Finance Minister Lawrence Wong on Tuesday.

DPM Wong said the hope is that the initiative can motivate insurers to allocate some of their investment portfolio to infrastructure projects that have decarbonisation potential, and play a role in the region’s net-zero transition.

“As underwriters, the industry can develop insurance solutions for renewable energy infrastructure and emerging technologies with promising decarbonisation potential.

“These solutions can mitigate risk and help crowd in much-needed private capital,” said DPM Wong, who is also chairman of the Monetary Authority of Singapore (MAS).

Speaking at the Global Insurance Forum at Hilton Orchard, he said renewable energy infrastructure such as solar and wind plants have variable returns as they rely on the weather.

To mitigate this, some renewable plants can have parametric insurance covers that pay out when energy output falls below pre-agreed thresholds.

Insurance can also mitigate the risks of storing and transporting future fuels like hydrogen, which holds huge promise for decarbonisation. 

As investors, insurers can allocate more capital, which is a key challenge, to address the infrastructure needs of emerging Asia, particularly green infrastructure, DPM Wong said.

To this end, MAS has been closely monitoring international standards in the insurance industry and studying available data.

DPM Wong said MAS will soon issue a public consultation on the proposed capital treatment for insurers’ investments in infrastructure assets.

Another area insurers can contribute to is transition financing, as it is expensive to decarbonise.

In transition financing, financial services are provided to high carbon-emitting industries to help fund their decarbonisation. These industries include coal-fired power generation, steel, cement, chemical, paper making, aviation and construction.

The need for transition financing is growing in Asia, which accounts for half of global greenhouse gas emissions. Asia relies on fossil fuels, such as coal, for most of its energy needs and the demand is increasing as it develops.

At the same time, governments and companies have to adapt to higher-for-longer interest rates, making the transition more costly.

Insurers can guide and incentivise firms to progressively decarbonise their business operations by integrating physical and transition risks as part of the underwriting process.

DPM Wong said MAS recently proposed guidelines on transition planning by banks, insurers and asset managers to facilitate credible and orderly decarbonisation efforts by their clients and investee companies.

This will be achieved through engagement and the facilitation of transition activities, rather than indiscriminately cutting ties with clients or investee companies that have higher climate risks, noted DPM Wong.

To do this well, insurers and brokers need to develop the right capabilities and solutions, he said.

Besides the pilot scheme, DPM Wong also announced the launch of a centre that will support companies’ transition efforts.

The WTW Asia-Pacific Climate Risk Centre in Singapore will develop risk advisory, analytics and risk financing solutions for firms in hard-to-abate industrial sectors that are key to Asia’s growth, such as real estate, transportation and natural resources.

Hard-to-abate industries use carbon as an integral part of their process, and this sector altogether accounts for about 30 per cent of the world’s greenhouse gas emissions.

Said Mr Christopher Au, who heads the centre: “Climate risk is a financial risk that is already affecting many businesses and valuations. This risk needs to be understood, quantified and managed – much like any other business risk.”

He added that there may be many activities going on in the climate and sustainability space, but to get to a lower carbon state where a business is resilient ultimately relies on the fundamentals of risk and return.

The new centre is the first such entity under risk management and insurance broker WTW, and it is looking to grow its team to 15 climate specialists to support clients in the Asia-Pacific region.