Climate Change and Sustainability

Each business faces vulnerabilities unique to its day-to-day operations; however, climate change has accelerated several major areas of risk in every industry, including:

• Physical: With severe wildfires, record-breaking heat waves, and intense flooding, the potential physical damage of climate change to people, property, and supply chains presents major losses for companies everywhere. These changing natural events also create new challenges for managing risk and staying resilient especially as some coverages become harder to obtain.
• Transition: The process of adjusting to a lower-carbon economy will lead to new risks for many, including changes in policy, technology, or investor sentiment that will need to be navigated.
• Reputational: Organizations will need to be able to identify, prioritize, and act on clear sustainability and climate initiatives. The potential financial and reputational impact of failing to do so can be just as costly as the physical damage of an event itself.

Companies will need to create a proactive risk management strategy and program that addresses each of these risks, as most will experience the impact of all three in the coming years.

Increasingly, insurers are assessing the sustainability (ESG rating) of their insureds and their commitments to transition as they look to reduce emissions in their underwriting portfolios. For some companies this may result in restricted access to risk transfer, while for others it could lead to improved terms. A further consequence is product innovation to support insureds to build back better following a loss and in recognition of new exposures.

No matter your industry, you may need to consider the following insurance implications:

• Directors and officers (D&O) liability: Failing to adapt to risk factors associated with climate change could lead to directors and officers being the subject of shareholder actions for breach of duty or loss of share value. Managing this vulnerability will become especially critical for carbon-intensive industries.
• Property: Amid widespread wildfires, flooding, and other severe weather events, organizations must proactively plan for the loss or damage of physical assets.
• Business interruption: Business interruption, especially for customers and suppliers, may be increasingly relevant as weather-related risks increase. Planning against business interruptions should extend to closures and losses related to events such as heat, drought, and flooding.

Although the assets each organization must consider in its risk management approach to climate change vary significantly, a comprehensive insurance policy portfolio that includes the above coverages can help mitigate losses and address risk vulnerabilities as a whole.

ESG can be a key driver of growth as well as part of business resilience. Therefore, leaders across every industry sector are focused on sustainability initiatives to reduce risk and leverage opportunity. Today, ESG needs to be part of corporate strategy and be embedded in the business and operating model.

We can help you:

• Prepare: Organizations will need to have a baseline assessment of their current operations to support planning for net zero and sustainability reporting. A seamless transition will require a comprehensive approach to risk management that addresses the resulting impact on the environment, people, and governance.
• Insure: Once leaders have an understanding of their risk landscape, it will be necessary to work with an insurance partner who is ready to help manage emerging threats with new and innovative service offerings.
• Analyze: Data-based decision making should drive all sustainability initiatives. As natural disasters become more severe and difficult to predict, leveraging best-in-class modeling tools and predictive analytics will be essential to understanding and planning for risk.

For today’s leaders, maintaining day-to-day operations, while making the transition to more sustainable processes, will prove critical to remaining profitable, keeping up with consumer expectations, and staying ahead of regulatory changes.

At Marsh, we can help you create a proactive risk management program to mitigate climate change risks, protect your assets, and invest for the future of your company and the planet.