Last week, Pollination hosted an event in collaboration with Clyde & Co that explored the climate and nature-related financial risks for insurers and their customers, including key considerations, trends and case studies, and the way forward for the insurance sector. Pollination Executive Director Rohit Das was there and shares his five key takeaways from the discussion.
1. Nature and climate crisis calls for the insurance sector to play a leadership role
The insurance industry has a key leadership role in our response to the climate and nature crisis. The insurance industry is in essence a system for risk transfer, a source of capital as an investor and a source of risk intelligence. Climate and nature risks present opportunities for the sector to monetise their risk intelligence capabilities. Key examples include de-risking of novel technologies in renewables and energy storage and carbon and biodiversity credits markets.
2. COP26 passed the baton to corporates but there are challenges for the insurance sector
The Glasgow COP led to the establishment of industry alliances under the Glasgow Financial Alliance for Net Zero (GFANZ). The obligation on the finance sector to facilitate the transition to net zero and mitigate climate risks was recognised. Climate-related financial disclosure norms encouraged investors and corporates and insurance underwriters to identify risks and articulate targets. These could include pathways to net-zero investment portfolios, 100% renewables and operational transformation. The insurance sector is witnessing challenges in relation to competition and anti-trust laws in some geographies which has resulted in a number of members departing from the Net Zero Insurance Alliance. However, individual insurers are factoring in climate-related risks and opportunities at the corporate level.
3. Nature-related litigation risks have a greater degree of materiality compared with climate risks
Climate-related litigation has been levelling out recently due to funding and the pace of attribution science. However, given that there is a pre-existing wealth of environmental regulation in most jurisdictions, a few recent examples of nature-related litigation has emerged and could be attractive for commercial funders as tracing nature-related impacts from tracing corporate supply chain is easier and the impacts are more localised. Additionally, there are other manifestations of litigation liability risks such as impacts on share prices, reputational risk, and damage to brand image. As a result, we are witnessing examples of agricultural companies and fashion brands being targeted by activist litigators.
4. Resilience and adaptation present new risks and opportunities
Climate adaptation presents a huge opportunity for the insurance industry as it is evident that current efforts to reduce emissions is leading us to a 2 degrees Celsius pathway and a warming planet will need more physical and fiscal resilience measures. Our current infrastructure needs to be replaced or refurbished to a higher level of resilience and new infrastructure needs to be built to support the transition. And these investments will require insurance solutions. There are challenges as these require understanding of engineering and new underwriting expertise of novel technologies. In addition, the insurance sector faces business risks as physical climate risks make the insurable window narrower with increasing instances of chronic risks such as sea level rise that makes certain regions and perils uninsurable.
5. Role of firms in adapting to changing climate
Firms have a key role to adopt a risk and resilience lens rather than a simple target setting approach to enable the pricing of risks effectively and implementation of solutions for adaptation. Prudential regulators have signalled that firms need to consider forward-looking risks and need to be able to substantiate the claims made to their customers. The financial services sector has the key role to drive adaptation actions and invest in solutions by working in close cooperation with governments. However, there is a disconnect between the different players within the financial services sector – especially between banking and insurance services and the kind of products and solutions they offer. There is a significant opportunity to link up and monetise data and risk products. The banking and insurance regulators also have a key role to play in supporting actions to mitigate systemic risks.
Pollination is already advising a range of clients across geographies and sectors to understand the importance of nature to the commercial viability of their business.
We are supporting companies to shift from awareness to action as there is now a clear imperative to address risks and seize the opportunities presented by nature.
We offer a range of workshops tailored to your organisation’s needs and maturity in this space. We work with board level and senior stakeholders to explore exposure to nature risk at an enterprise level; to co-design strategies to mitigate risks and maximise market opportunities; as well as to design innovative, future-proof solutions with nature at their core.
For more information or to discuss this further please contact Marisa.Chiarella@pollinationgroup.com, Head of Business Development.