Insurers’ role in managing impacts of climate change and energy transition risks

The Economist Impact’s 4th annual ESG & Climate Risk Week event took place last month, setting out the most effective ways to identify, measure, manage and report on ESG issues and climate-related risks. The event provided an intellectual agenda for businesses to better understand managing risks and opportunities, with practical lessons that leaders could immediately apply to their organisations.

To date, the most significant policy development in this space came in 2017, when the Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. In 2022, the UK Government made it mandatory for the UK’s largest traded and private companies to disclose climate-related financial information, demonstrating the onus on corporates to take concerted action in this field.

During one particularly insightful session during The Economist Impact ESG & Climate Risk Week – Insurers’ role in managing impacts of climate change and energy transition risks – Sierra Signorelli, the CEO of Commercial Insurance in Zurich Insurance Group, highlighted how the insurance industry, an often-overlooked section of the financial market when it comes to climate change, can positively influence companies to mitigate the risks of climate change.

At present, the role of the commercial insurance industry is to support businesses to assess risks to their existing operations, a process which often involves stress testing for future risks. Given this expertise, Signorelli argued that the industry is uniquely well-qualified to support businesses, not only through standard risk transfer mechanisms, but also to spread wider understanding of the extensive physical risk posed by climate change to existing supply chains and physical infrastructure.

As well as being concerned about the direct impacts of climate change on business resilience, Signorelli has seen growing interest from business leaders who are seeking to gain a better understanding of potential disruption to the wider community, including their employees, taking into account environmental changes such as air pollution and how this may impact an employee’s quality of life and productivity. As Signorelli quipped, “you can make a facility an impenetrable fortress, but if you don’t have any employees to come to work, it’s a pointless exercise.”

With access to highly complex risk models and practical claims experience, Signorelli believes the insurance industry can help businesses to understand the true extent of their exposure and inform decision-makers on how best to minimise future losses. This expertise can ensure investment is directed into preventative measures that will yield the greatest benefit – i.e., the most substantial gains in business resilience.

Signorelli went on to highlight the efforts made by Zurich to proactively engage with businesses on the new transition technologies that are being implemented with positive impact on climate change at the front of mind. While these are superb developments which will aid in the fight against climate change, it cannot be overlooked that the rapid uptake in new transition technology needed across industries – such as the electrification of fleets, carbon capture technology, and hydrogen fuel – all bring new risks to businesses and therefore require amendments to coverage and policies.

Without an appropriate insurance policy that properly accounts for the new risks attached to these novel technologies, insurance runs the risk of becoming an impediment to progress. In short, insurance is a necessary component of support the climate technology transition.

Signorelli concluded by acknowledging that the path forward is uncertain and complex, and it requires collaboration from all corporate stakeholders to increase the sustainability drive across the value chain, therefore the insurance industry must play an equally central role in this drive. In the long run, Signorelli hopes that the investment in low-carbon technology in developed countries can eventually be scaled up and spread to developing countries to ensure economic growth in these nations is not undermined.

Ultimately, Signorelli’s opinion rings true of a shared sentiment across industry, that climate change can only be effective with collaborative action. While in most discussions about the role of the finance sector in mitigating climate change focus on generating investment for green technology, it would be short-sighted to assume businesses can deliver this major transition without the support and protection that robust insurance provides them.

Put simply, with the right cover, businesses are in a position of knowledge and empowerment to make radical changes to their operations, while at the same time being able to deliver stable growth with protection from adverse climate change events. Without this guard rail, sustainably focused corporate action could be marred by avoidable financial losses.

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