In the year to January 2022, companies reported a more significant drop in resilience to environmental risks than to any other risk. Nicholas Pearson examines the drivers behind this development

There is no doubt that environmental risk is on the corporate radar, but the start of 2022 has seen it move onto centre stage. While in 2021, a creditable 40 per cent of UK and US business leaders felt very prepared to anticipate and respond to environmental risk, in 2022 that proportion fell to 34 per cent, according to Beazley’s 2022 Risk and Resilience research.

We see three factors driving this change. One: a rise in merger and acquisition activity. Two: an enhanced regulatory focus – particularly on a group of chemicals known as PFAS (per- or poly-fluorinated alkyl substances). And three: environmental loss associated with extreme weather events.

Rise in M&A activity M&A activity rose an unprecedented 24 per cent in 2021, with 62,000 deals announced globally and disclosed deal values reaching all-time highs of US$5.1 trillion, according to PwC’s Global M&A Industry Trends: 2022 Outlook.

Deal-making was fuelled by intense demand for technology, and for digital and data-driven assets, but many deals also involved acquisition of land and property for logistics centres, potentially exposing acquirers to historic or poorly understood environmental liabilities.

Enhanced regulatory focus

The second key factor driving enhanced environmental risk awareness is the growing burden of environmental regulation as part of the global focus on all matters ESG – environmental, social and governance – including an increasing regulatory focus on PFAS.

PFAS are a group of more than 4,700 chemicals called ‘per- and polyfluoroalkyl substances’. These substances are also known as ‘forever chemicals’ because they are persistent organic pollutants that have been found to accumulate in soil, drinking water, livestock and, ultimately, the human body.

PFAS have widespread applications in everything from water and stain-resistant treatments for textiles, to cosmetics, non-stick cookware, food, food packaging and, notably, the foam used in fire-fighting. This means their presence in the natural and human environment has been increasing – whether through every-day usage of products that contain them, industrial accidents or deliberate dumping of industrial waste, or seepage from landfill sites. Whatever the cause, fears are rising about the growing impact these chemicals could have on public health.

Growing health concerns

While high levels of PFAS are thought to affect growth, the learning and behaviours of infants and older children, research is still ongoing. There is evidence to suggest that large amounts of PFAS in the blood stream may lower a woman’s chance of getting pregnant and could be associated with enhanced risk of pre-eclampsia. They interfere with the body’s natural hormones, increase cholesterol levels and can affect the immune system.

There are also strong concerns regarding PFAS’ propensity to increase the risk of kidney or testicular cancer and to cause ulcerative colitis and thyroid disease. While there is always an argument over health effects, the body of evidence is growing and regulators are taking action.

Biden ups the ante

2021 and the election of Joe Biden to the US Presidency marked something of a landmark for US businesses in terms of environmental responsibilities, particularly around PFAS. Under the Biden-Harris Administration, the Environmental Protection Agency has restored scientific integrity and accelerated the pace of research and actions needed to tackle what it terms “the PFAS crisis” to “protect American communities”.

Among other initiatives, the EPA is requiring enhanced monitoring of PFAS levels in drinking water, exploring enhanced clean-up requirements and considering introducing new monitoring and reporting standards on PFAS’ use.

More broadly, in 2022, a global framework for nature-related disclosures (through the Taskforce on Nature-related Financial Disclosures – TNFD) is to be trialled and in the EU, the proposed Directive on Corporate Sustainability Due Diligence is expected to be adopted, which will require companies with significant turnover to understand whether value chain activities are having an adverse impact on biodiversity, causing environmental harms or human rights abuses.

Costs are rising

Against this backdrop, it is little surprise that companies face steeply rising costs related to environmental exposures in their supply chain. According to CDP, a charity that runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impact, companies face up to US$120 billion in costs from environmental risks in their supply chains by 2026.

Against this backdrop it is little surprise that business leaders’ concerns regarding environmental risk are shifting. In 2022, just over a fifth of business leaders in the US and UK ranked environmental concerns, including environmental loss; biodiversity damage; pollution or harm caused by or to the business, their top risk. US business leaders were notably more concerned than their UK counterparts, with 24 per cent ranking the risk top vs 19 per cent in the UK.

According to Beazley data from 22nd January, the sectors most concerned by environmental risk are healthcare and life sciences, marine and warehousing and manufacturing.

Insurers must respond with care

The volume of regulations concerning environmental protection, coupled with the speed and frequency of regulatory change, means companies are forced to continuously adapt their activities to new circumstances and thresholds to avoid penalty.

Enhanced oversight of evolving legal and regulatory developments on a national and (where appropriate) international level is clearly essential, but leaders will also need to review what insurance protections they have in place, as most general liability covers will have broad pollution exclusions.

Environmental impairment liability coverage can cover firms for both their own operations on property they own or those of previous occupiers of that property, as well as covering contractors for operations on third party sites. It can also cover third-party costs for contamination of neighbouring property, and potentially loss of business for those on neighbouring property.

Coverage triggers could include a variety of claims including clean-up costs, natural resource damage, legal defence, business interruption, bodily injury, property damage and legal defence.

Good risk management is essential

Unsurprisingly, many carriers are growing increasingly cautious around environmental risk. Extensive due diligence on prospective clients’ property and/or construction projects has become the norm, particularly regarding the risk of PFAS contamination before it is possible to decide how or whether to include PFAS contamination risk and at what price as part of broader environmental cover.

The ability to get one’s arms around the myriad of potential regulation around emerging issues, new regulation and meeting net zero goals whilst also running a business during economic uncertainty means that having bespoke insurance coverage to address the potential for a financial loss is critical.

This article was published in the May-June 2022 issue of CIR Magazine.

Download as a PDF

Read more features like this

    Share Story:


Cyber risk in the transportation industry
The connected nature of the transport and logistics industries makes them an attractive target for hackers, with potentially disruptive and costly consequences. Between June 2020 and June 2021, the transportation industry saw an 186% increase in weekly ransomware attacks. At the same time, regulations and cyber security standards are lacking – creating weak postures across the board. This podcast explores the key risks. Published April 2022.

Political risk: A fresh perspective
CIR’s editor, Deborah Ritchie speaks with head of PCS at Verisk, Tom Johansmeyer about the confluence of political, nat cat and pandemic risks in a world that is becoming an increasingly risky place in which to do business. Published February 2022.