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The rising risk on land

According to the IPCC Special Report on climate change and land, human activities have altered roughly 75% of the Earth's land surface in the past millennium.

According to the IPCC Special Report on climate change and land, human activities have altered roughly 75% of the Earth's land surface in the past millennium. Much of the change is driven by a combination of agriculture, urbanization, infrastructure, and natural resource extraction.

This is significant for multiple reasons, including the natural environment's role in purifying our air and water, supporting economic activity, and mitigating the effects of climate change.

Balancing economic growth, natural resource preservation, and climate change risks requires careful navigation, managing diverse stakeholders’ interests, and complex trade-offs.

As a result, issues surrounding land-use pressures are increasingly on the business agenda, impacting compliance, operations, finances, reputation, competition, and strategy considerations.

As highlighted in Marsh McLennan's publication Rooted in resilience: Innovations in nature insurance for business, integrating land use into risk management and decision-making is vital for businesses. This can be complex to do as the risks relating to land use are site specific with each location having distinct risks and opportunities.

Here, we examine four areas of risk that companies need to be aware of.

1 – Emerging regulatory requirements for sustainable land-use planning

Complying with regulations and permits for land-use change is becoming more complex, particularly in the context of global efforts to address nature and biodiversity loss. There is far more focus on issues like deforestation, habitat destruction, biodiversity impact, soil degradation, and community displacement.

For example, the UK Biodiversity Net Gain law, effective since January 2024, mandates development projects to positively impact biodiversity by improving wildlife habitats post-development. In France, the August 2021 Climate and Resilience Act aims to achieve zero-net artificialization of soils by 2050, protecting and preserving land. Colombia requires habitat banks to preserve biodiversity, create economic opportunities, and compensate for environmental impacts through habitat restoration and conservation. These regulations address funding deficits and promote sustainable management of natural resources.

In line with this trend, there are now insurance solutions that cover land and water resource restoration to mitigate the effects of soil artificialization (the transformation of natural land into artificial or man-made surfaces). For example, real estate companies operating in the EU face growing requirements to minimize construction on pristine land, leading to increased focus on redevelopment of brownfield sites. This requires demolition, soil purification, and reconstruction. Insurance coverage is available in the event of unforeseen residual pollution from brownfield developments.

In addition to sustainable land-use regulations and policies, non-financial reporting frameworks are emerging with disclosure requirements for land use and change. These increasingly form a key part of sustainability reporting: demonstrating environmental stewardship and addressing sustainability issues.

Frameworks like the EU Corporate Sustainability Reporting Directive (CSRD), Taskforce on Nature-related Financial Disclosures (TNFD), and Global Reporting Initiative (GRI) provide tools for organizations to understand and report their impacts on the economy, environment, and societies. Increased disclosure will likely lead to increased accountability for businesses and their value chains.

2 – Trade network and supply chain vulnerabilities due to land-use issues

Land-use risk is also present in an organization's supply chains. The accelerated loss of fertile land, deforestation, and climate change-induced loss of biodiversity contribute to land degradation. Land degradation can have significant consequences for commodity access, availability, and sourcing costs.

Moreover, organizations face legal and reputational risks if their supply chains are connected to activities that violate land-use regulations or contribute to deforestation, biodiversity loss, or land degradation. This is further heightened by the increasing consumer and stakeholder demand for sustainable and responsible supply chains. For example, The European Union Deforestation Regulation (EUDR) is a new law aimed at addressing climate change and biodiversity loss. By the end of 2024, large companies handling key commodities like coffee, cocoa, soy, palm oil, cattle, rubber, and wood must prove that their supply chains did not involve deforestation after 2020, whether it occurred legally or illegally. This requires tracing the key commodities or facing significant penalties from the EU, with a potential economic impact on the trade of these commodities across the continents.

The potential financial implications include increased costs from alternative sourcing or implementing sustainability measures, as well as potential fines or legal penalties for non-compliance with regulations.

Marsh’s SentriskTM capability can help clients map their supply chains and identify areas of potential land use vulnerability allowing them to proactively manage risk. This, in turn, opens the door to increased availability of insurance to address supply chain exposures.

3 – Use of land for climate mitigation through carbon capture

Land, overall, acts as a net sink for carbon dioxide through various natural processes; however, anthropogenic land use — including agricultural activities, conversion of natural ecosystems, drainage of peatlands, afforestation, reforestation, and forest management — remains a net source of emissions. To transform land use from a source of carbon to a sink of carbon, significant reductions in ‘agriculture, forestry, and other land use’ (AFOLU) emissions and substantial increases in carbon storage and sequestration are necessary.

Carbon credits are often generated through land-use projects, such as reforestation, afforestation, and sustainable agriculture, which effectively reduce, remove, or avoid greenhouse gas emissions. Businesses can offset their residual emissions, typically Scope 3 emissions, and meet climate targets by purchasing these credits.

However, it is important to be aware that utilizing carbon credits comes with certain risks. These risks include the potential for reversal or loss of carbon stocks, the challenge of accurate measurement, the possibility of regulatory changes, market volatility, and the potential for social and environmental impacts that could lead to reputational damage.

The insurance sector is offering innovative solutions to reduce risks in voluntary carbon markets for both buyers and project developers. These solutions cover physical risks, such as the integrity of carbon credits, as well as financial and geopolitical uncertainties.

4 – De-risking climate resilience

Sustainable land-use has multiple co-benefits, including building resilience to climate change. According to the Marsh McLennan publication Staying above water: A systemic response to rising flood risk, key climate adaptation actions for land development projects include implementing new building standards, integrating green and grey infrastructure, and establishing financial incentives for rural land development.

Nature-based solutions (NbS) address climate change, nature loss, and provide social benefits, such as improving health, creating economic opportunities, and reducing disaster risk. Organizations adopt NbS to decarbonize, support a nature-positive economy, and address societal issues through habitat banks and landownership strategies. NbS also mitigate natural hazards, including urban flood risk, by incorporating features like vegetation, permeable pavements, green roofs, and restoring natural channels. This improves the land’s sponginess and enhances its ability to absorb and retain water. The Green Finance Institute's publication on Financing Natural Flood Management (NFM) examines enablers, solutions, and barriers relating to NFM in the UK, facilitating global exploration and de-risking of these projects.

Nature-based solutions can be insured, and derisking improves the insurability of assets by enhancing their defense. These insurance products cover and support projects that use nature-based approaches to address climate change. Coverage could include activities like reforestation, wetland restoration, coral reef preservation, green infrastructure development, and ecosystem conservation. Derisking these solutions enables businesses and organizations to effectively manage, implement, and sustain nature-based projects for long-term effectiveness and sustainability.

Our expert team works closely with businesses to comprehensively assess, effectively manage, and proactively mitigate these risks. By doing so, we inspire confidence in reporting and disclosure, enabling our clients to showcase their commitment to sustainable practices.

Additionally, we provide access to innovative risk transfer solutions.

To learn more, reach out to your Marsh contact.