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Why do business leaders rank environmental risks so low in their list of concerns?

Climate crisis and environment policy, ESG or ecology problem concept, businessman leader watering seedling  plant on bar graph with pollution smoke rising up.

What is the difference in perception and resilience amongst business leaders to environmental risks, and are businesses fully prepared for the associated risks – such as pandemic, climate change, environmental damage, food security and energy transition?

The latest report in our Risk & Resilience series explored this issue in more depth and revealed that business leaders rank environmental risks very low in their list of risk concerns – even predicting that their concern would diminish further over the next twelve months.

Given the pace and scale of environmental change and the measures announced at the recent COP26 summit, it is our hope that environmental risks will become more significant on corporate agendas over the coming year, with ESG becoming an ever pressing concern.

It stands to reason that firms that heed ESG principles are likely to be better risks over the long term. ESG considerations will become an increasingly significant underwriting factor in the coming years, and as a business we are keen to support clients that demonstrate strong ESG credentials.

We recognise that as an industry, we cannot accelerate further now without greater investment in the sharing of data as we learn more about how ESG principles can reduce risk. We need to build these lessons into our underwriting, claims and investment process to deliver innovative insurance solutions that provide additional cover to clients that perform highly against established ESG metrics.

Aligning social and corporate goals

It’s important to remember, however, that whilst ESG dominates the headlines we need to prioritise the positive tools and technologies that will allow change to happen. If we focus only on compliance requirements or doomsday scenarios, we risk turning off a large part of the global audience that needs to be engaged.

Companies need to ask themselves searching questions about how their business is dealing with environmental concerns. The insurance industry also needs to ask questions about how companies are monitoring and managing risk in these areas and this should certainly be part of every D&O renewal meeting discussion.

How should the insurance industry respond?

ESG concerns create both challenge and opportunity for the insurance industry. High profile markets, such as Lloyd’s of London, are firmly in the cross hairs of stakeholders and activist environmental groups.

Underwriting models are being challenged. New hazards will emerge as the transition to a greener economy takes place, requiring new products and new underwriting solutions. The challenges in shifting to clean fuels, such as hydrogen, are significant. Losses on offshore wind and on large solar plants have been substantial for example – green assets are just as exposed to catastrophe risk as traditional energy assets – possibly even more so.

Traditional modelling, particularly around natural catastrophe exposures and, more broadly, past loss experience have not been predictive of the future, and that will need to be corrected. This will require coupling a deep knowledge of the risk landscape with technology advancements to map a better future, something that will require significant investment over time. Much work still remains to be done to create a common framework for evaluating the strength of businesses’ green credentials.

However, progress is already under way through moves like the Sustainable Markets Initiative and ClimateWise initiatives to support insurers to make informed decisions as part of the transition to a greener economy. It is also hoped that policies announced at COP26 will have a marked impact, including particularly the creation of the new International Sustainability Standards Board (ISSB) that is introducing new prototype global standards on climate-related disclosures and general sustainability disclosure requirements.

Initiatives like these are sparking a huge amount of collaboration across the industry to create common methodologies and appraisal mechanisms. The issue, as always, however, will be the quality and availability of the data needed to support informed decisions and how the industry implements new approaches in order not to destabilise communities dependent on particular energy sources for employment and power. The sometimes competing demands of the E, S and G agenda mean that for a while, insurers and others will be performing something of a careful balancing act, one that must end in favour of progression over paralysis.

Driving better alignment between business and social agendas is a complex challenge that requires long-term solutions and dedication if we are to succeed. A key factor in that success will be working together to forge stronger, deeper relationships and clear prioritisation to invest in a strategic roadmap creating a more sustainable planet for all. Delivering on these objectives will require more breakthrough innovation in this space, greater collaboration around standard-setting and regulation, and a heightened sense of urgency to deliver real solutions.

The link between ESG credentials and loss ratios is beginning to be established and access to more high quality data is improving. Progressive solutions to problems as complex and wide-ranging as these that speed up the transition will not be developed overnight nor in response to unrealistic demands, but through market alignment, collaboration and further sharing of data.

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