Rising inflation and economic concerns have dominated the headlines in recent weeks. While there are some signs that disinflation may be beginning in some corners of the economy, uncertainty remains high.
How governments respond to the challenge of managing inflation and facing the risk of an economic downturn while also looking to continue the recovery from the pandemic will be key for market players to monitor. And we’re already seeing significant plans emerging as attempts to manage the situation.
As many parts of the norther hemisphere bake in unprecedented heat, responding to climate change also comes into focus at this time. The combination of these issues means that green investment lies at the heart of many of the plans put forward to combat both economic uncertainty and climate change.
This creates an opportunity for the surety and trade credit insurance sectors to play their role in the transition to more sustainable economics. The current environment also provides a platform for our industries to demonstrate their continued benefit and relevance to economies, as well as building greater resilience in trade and commerce when that is most needed.
What has happened?
The most prominent example of government policy designed to address both climate change and inflation is the recently enacted Inflation Reduction Act (IRA) in the US. The IRA is a broad piece of legislation which tackles several issues under the heading of inflation reduction, including tax reform, infrastructure spending and prescription drug pricing. Notably, it also contains specific plans around tackling climate change. The new law is a scaled back version of the originally proposed, Build Back Better Act, which had failed to win broad enough political support to pass.
Although the envisioned cost and spending is significantly lower than what had been proposed under the Build Back Better plan, the IRA is still seen as an important step in a number of areas. Measures aimed at addressing environmental change are expected to further boost the decarbonisation of the US economy in particular. It includes over USD 350bn of spending on efforts to promote solar and wind energy projects, energy efficiency in housing, improvements to public transport infrastructure, as well as measures targeted at supporting nuclear and other non-carbon energy production methods. Other funding is also made available for fossil fuel industries in the US also, including oil and gas pipelines and efforts to enhance nascent carbon capture technology.
Elsewhere, plans are being enacted by government on various scales to address these issues in different ways. In the EU, recent plans to reduce reliance on natural gas in light of the Ukrainian conflict have progressed with plans targeting significant cuts in the use of natural gas across Europe. Similarly, important votes recently took place in the European Parliament on the EU taxonomy which defines what counts as sustainable investment. These votes acknowledge natural gas and nuclear energy as eligible in this context for categorisation as sustainable investments. This was a controversial point for many activists, but it is likely to enable greater investment in cleaner energy projects in Europe, particularly in areas where breaking the reliance on coal has been slow.
Many other countries across the world, including China and India have similar carbon reduction plans in place. Indeed, despite some pessimism about progress, recent studies suggests that carbon emissions have been stable, rather than increasing in recent years, including some sectors seeing net reductions. Ensuring that trend continues will require a combined effort of government policy, responsible business practices and innovation in new technologies.
The role of credit insurance and surety
Credit insurance and surety facilitate trade and commerce, while also protecting investment in a range of projects. With a greater focus on green investment, demand for protection of obligations related to this, as well as for protection of receivables related to green products and services will grow. While there are real challenges faced by economies around the world in the short term, there are equally many opportunities opening up.
The products offered by the trade credit insurance and surety sectors boost resilience in many ways. We tend to focus on the environmental aspect of sustainability, but more resilient supply chains, trading networks and investments also form a core part of the sustainability agenda. This ensures that public funds are protected and importantly, that there is greater predictability of outcomes – an essential element in investment.
ICISA supports its members to develop wider industry perspectives on how to address the challenges faced by society now and in the future. When crises arrive, our members deliver stability and certainty, as well as careful risk management – something proven during the pandemic. Getting economies going again after the pandemic is already marked by a range of challenges and opportunities. And our industry will continue to play its role in supporting clients throughout the world to succeed at what they do best.