Stop loss strategies
As COP 28 approaches, Deborah Ritchie speaks to Nigel Brook about what corporates and their insurers should be aware of, and what new legislations and technological innovations may be on the horizon post-COP and as we head into a new year
What should corporates and their insurers be aware of as COP 28 approaches, and discussions focus on what can be achieved by 2030, rather than 2050?
If discussions at COP 28 do lead to an increase in policy ambition – which could take a number of forms – then it could be quite consequential for the fossil fuel industry over the next seven years, with an acceleration of the transition from fossil fuels to renewables. If that were to happen in a concerted way, it could materially affect operations and capital expenditure.
Something we might see as part of any policy shifts coming out of COP 28 is countries starting to move subsidies away from fossil fuels towards renewables. Global deployment of new solar and wind is already growing exponentially, and such a shift would increase this acceleration. And growth in renewables, or indeed in other technologies critical to the transition (such as electric vehicles, green hydrogen, green steel), should create underwriting opportunities for insurers.
Energy insurers are already seeing a shift in who is buying cover and the risks being covered, such that I think most insurers expect the make-up of their energy books to change substantially over the next seven to 10 years as renewables account for more and more electricity generation around the world and electric vehicles erode oil demand.
Even for the existing companies they underwrite, the balance of their business will shift as well, and so too will the risks that come with that. Risks associated with offshore wind, for instance, are quite different from those in oil exploration and production – and that will have implications on their books of business, if not directly necessarily on their loss experience.
Quite a few insurers are setting ambitious policies to move away from insuring fossil fuels but that’s not something that will happen overnight, of course.
What new legislation is on the horizon, and which sectors will be the most heavily impacted?
What we’re increasingly seeing is climate and nature being spoken about in the same breath. Since the Taskforce on Climate-Related Financial Disclosures voluntary reporting framework was published in 2017, it has rapidly become the gold standard; new European climate reporting regulations wrap themselves around it, the UK and other countries are making TCFD reporting mandatory, and the International Sustainability Standards Board has also adopted the framework.
We now have reporting recommendations from the TNFD (the Taskforce on Nature-Related Financial Disclosures), which were published on 18 September. I’d expect to see these following a similar playbook to TCFD, in terms of adoption by voluntary standards bodies and ultimately by legislators. The ISSB has already indicated that it will take the TNFD recommendations into account.
I think this topic will rise rapidly up the agenda, not least because the rapid degradation of nature and loss of biodiversity poses real dangers to the world economy. It’s been estimated that over 50 per cent of the world’s GDP is moderately or highly dependent on nature and its services.
A key problem is that most companies don’t have the information needed to understand the ways in which their operations and value chains and financial performance could be impacted by the degradation of ecosystems. New EU reporting obligations will force companies to address this.
In Montreal last December countries around the world agreed to address biodiversity loss, restore ecosystems and establish a sustainable food system, with ambitious goals for 2030. These include conservation of at least 30 per cent of the world’s lands, inland waters, coastal areas and oceans, and restoration completed or underway on at least 30 per cent of degraded on- and off-shore ecosystems.
Nature is expected to be high on the agenda at COP 28 too. One of the goals for discussion is making people and nature central to climate action, and we should also see plans to preserve rainforests and to implement nature-based solutions, such as restoring mangroves, which act as carbon “sinks” but also safeguard coastlines and ecosystems.
Tied in with this is the issue of water shortage – again a looming crisis that plays into the other two. Various factors are at play, including changing rainfall patterns due to climate change; natural aquifers being overdrawn by growing populations; and poor water management.
It is increasingly a concern for businesses, too – McKinsey have estimated that two-thirds of businesses face substantial water risks in their direct operations or in their supply chains. CDP have estimated the cost to businesses of water risks is U$301 billion – and that the expense of addressing these risks was less than a fifth of this figure.
What technological innovations can we expect to make headlines during COP 28?
Wind and solar are now firmly established, with deployments growing exponentially. To illustrate this, in solar, the world is currently adding the equivalent of a new nuclear reactor every day. We’re also seeing exponential growth in batteries, electric vehicles and heat pumps.
At COP 28 we could also hear about new and emerging technologies such as modular floating wind arrays (which can be deployed in deep water), direct air capture (to remove CO2 from the atmosphere), and lab-grown meat (to address the heavy carbon footprint of cattle).
We’ll also probably hear quite a lot about hydrogen. Today nearly all hydrogen is not ‘green’ because it is produced from coal or natural gas with high CO2 emissions. In the future it could be made in a climate-friendly way by electrolysing water using renewable electricity, and then be used to store surplus green energy or to decarbonise hard-to-electrify sectors such as long-distance transport and heavy industry. When burned it doesn’t produce any CO2.
This article was published in the Q4 2023 issue of CIR Magazine.
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Stop loss strategies