If you look at the wealth that Elon Musk has built through Tesla and that is financing his whimsical bid for Twitter, his fortune is a bet on the future. Tesla has only about 1% of the global car market. Its profits for the past three years have totaled about $5.5 billion -- much of that dependent on government subsidies for purchases of electric vehicles. Yet Tesla commands a market value north of $1 trillion and provides the bulk of Musk's $260 billion personal net worth because the market sees enormous potential for electric vehicles, in general, and Tesla, in particular.
Can we get the market to sprinkle some of that fairy dust based on potential on us, too? In a word, yes.
Insurers surely won't generate the shovelfuls that Musk has managed to heap on Tesla, but insurers can create much better narratives for investors if they start playing offense, and not just defense, on the issue that has carried Tesla and Musk to such heights: how the world can get to net-zero on emissions of greenhouse gases (GHGs).
A recent article from McKinsey frames the opportunity like so:
"Nearly 90% of emissions are now targeted for reduction under net-zero commitments, and financial institutions responsible for more than $130 trillion of capital have declared that they will manage these assets in ways intended to hold warming below 1.5°C. This wholesale shift toward institutions and projects that emit minimal GHGs may create the largest reallocation of capital in history.
"At present, about 65% of annual capital spending goes into high-emissions assets. But in a scenario where the world reaches net zero in 2050, McKinsey analysis suggests that this pattern would reverse; 70% of capital outlays through 2050 would be spent instead on low-emissions assets. And as organizations adjust their operating budgets, they would pay trillions of dollars for renewable energy, circular materials and other low-emissions inputs during this time frame."
The CEO of a successful software company once told me that his strategy was to find a parade and jump in front of it, waving a baton -- and McKinsey is describing quite a parade.
The consulting firm identified 11 net-zero "value pools" that could generate a total of more than $12 trillion of annual revenue by the end of this decade, including: transportation ($2.3 trillion to $2.7 trillion per year), buildings ($1.3 trillion to $1.8 trillion) and power generation ($1 trillion to $1.5 trillion).
McKinsey also says: "Certain markets for green products and services are also proving to be more lucrative than markets for conventional offerings, as green premiums start to kick in. The most profitable opportunities have emerged in fast-growing niches such as recycled plastics, meat substitutes, sustainable construction materials and chemicals, where margins can be 15% to 150% higher than usual as demand for traditional products softens. In the plastics market, for example, consumer-packaged-goods players are changing their sourcing practices to reach sustainability targets."
McKinsey warns: "The flip side of increased spending on low-emissions assets is the stranding of today’s emissions-intensive assets. McKinsey analysis suggests that some $2.1 trillion of assets in the global electric-power sector alone could be stranded by 2050."
Now, insurance companies aren't going to start making electric vehicles, low-carbon cement or plant-based "meat" or doing many of the other things that McKinsey says can make companies leaders in the march toward net-zero. But insurers can still do a lot.
For one, insurers can start figuring out how to best insure those companies that are making electric vehicles, low-carbon cement, plant-based "meat" and so on. Innovation can't happen unless someone figures out how to deal with the risks, and the insurers that figure out how to do so will ride the wave just as surely as those making the new types of products.
Those insurers with big investment portfolios can start to lean into the trends that McKinsey describes in such compelling detail.
Insurers can also start to lay out more of a vision for a net-zero future, as a way both to draw investors and to attract talent. Some are starting to talk about related issues such as rising sea levels, increased hurricane activity and a surge in wildfires, but, while that sort of talk might feel innovative, it still reflects the traditional defensive posture that most businesses are taking. There is an opportunity to go on offense, describing, perhaps, how insurers are working with car companies to lower the high cost of repairs for electric vehicles, are quantifying the risks for low-carbon cement (which will behave differently than traditional cement in some uses) and so on.
There is a great story to be told about all the opportunity being created by the push to net-zero and about the role insurance can (must) play, but nobody is really telling it. Whoever gets this right still won't be able to spend $44 billion on a whim, as Musk is planning to do. But they should still see massive success as they help lead the way into a world of opportunity.
There's quite a parade out there that's just waiting for someone to jump in front of it with a baton.
Cheers,
Paul