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Environmental Risk Round-Up June 2021

Our Sustainability Think Tank has collaborated on a Risk Round-Up summarising all the key learnings and developments within Sustainability regarding environmental risk.

There is a huge amount of activity and developments within Sustainability; our Sustainability Think Tank summarises and provides additional insight from the experts on the all-important “So what?” that needs to follow.

Read the full round up below, or download by clicking the button:

Welcome to the third issue of The Camelot Network’s Sustainability Think Tank Newsletter!

What is Camelot?

Camelot is a network of independent consultants operating in insurance. It is made up of members who have been there and done it in C-Suite or Senior insurance roles.

What is a Think Tank?

Think Tanks pool together the network’s expertise on specific subjects, combining various backgrounds & experiences, for an extremely well-rounded & multifaceted approach.

What is this Think Tank?

The Sustainability Think Tank focuses on the role of insurance on topics such as climate change. Our expertise covers sustainability and climate change and more widely risk management, financial regulation, cat modelling, and marketing and innovation.

What is this newsletter?

This newsletter helps readers to remain on top of the exceptionally large amount of activity taking place around developments in sustainability. This includes understanding how views are changing and, crucially, the business implications. We list publications in an accessible manner, with a summary & our views about the ‘so what’ that is often overlooked.

IN THIS ISSUE…

We cover changes in consumer habits as they opt for more sustainable products, how courts can force companies to strengthen their climate strategy for the future, and new methods for developing a normative approach to climate-affected risk metrics!


COURT ORDERS ROYAL DUTCH SHELL TO SPEED UP DECARBONISATION EFFORTS

DATE PUBLISHED: MAY 2021

AUTHOR: FINANCIAL TIMES

WHAT IS IT?

Royal Dutch Shell was ordered to reduce net emissions by 45% by 2030 based on 2019 levels, reducing its carbon footprint from both sale and production operations.  

Company climate strategy was described as not concrete and violated duty of care of human rights of those affected by climate change. Shell was advised they need to do more than monitor developments in society and comply with regulations in the countries that Shell group operates.

SO WHAT?

The case is the first of its kind to force commitments to reduce emissions in the future vs liability for past actions. The ruling will require a change in corporate policy and require unused oil reserves be left in the ground.

We know stakeholder views and demands are becoming more climate focused. This precedent could open more than just oil companies to lawsuits and action to ensure they have proper climate strategies and have done the deep level planning required to get there. It brings further gravitas to NGOs and activists that analyse company activities, increasing their voice and influence. 

Also, requiring Shell to make commitments at the group level will ensure that reductions are stronger than reductions required in some countries. Shell will be forced to drive change instead of just complying with the level of emission standards set by some governments.

NORMATIVE APPROACH TO RISK MANAGEMENT FOR INSURERS

DATE PUBLISHED: APRIL 2021

AUTHOR: CAMERON RYE, JESSICA BOYD & ANDREW MITCHELL

WHAT IS IT?

Efforts to quantify the impact of climate change typically focus on ‘exploratory’ scenarios that describe possible future climates, but which are typically difficult to apply in a business context, since they do not produce specific risk information actionable by an individual insurer. The authors argue that this therefore needs to be complemented (not replaced) by an alternative ‘target seeking’ (‘normative’) approach. This approach sets impact threshold(s) for change in risk metrics currently used within the business and which can therefore be monitored and actioned within the existing risk management framework. 

For example, an insurer could define an impact threshold pegged to a 1% annual probability (1 in 100 year) of exceeding the present-day 1 in 200-year windstorm catastrophe loss to its portfolio. The likelihood of breaching this ‘early warning’ threshold would be then monitored over time using existing catastrophe modelling tools. Corrective action (e.g. adjustment of the underwriting portfolio and/or increase in capital held or accessible via reinsurance) would be taken periodically over this period, rather than waiting until the threshold is approached or breached. Impact thresholds could also be developed for changes in other risk metrics, including change in expected loss of the portfolio, the return period of historic events, and the likelihood of extreme disaster scenarios. All of these metrics are expected to vary over time (i.e. they may go up or down or both) due to climate change over the coming decades. The paper finishes with a clear call for cross-industry collaboration in implementing these ideas.

• It is challenging to translate the outputs from exploratory climate scenarios into risk information relevant to insurers. This paper is therefore to be welcomed, as it proposes an approach that relies on risk metrics already in use by the business. It is recommended here as essential background reading for anyone involved in climate risk assessment in insurance.

• We should be aware that change in climate-affected risk metrics will also be impacted by unrelated major changes in underlying exposure and vulnerability over the coming decades. Changes in risk metrics will encapsulate all of these effects. For general insurance risk reporting this is likely to be acceptable, since the focus is on ensuring sufficient capital is held and pricing is adequate, regardless of cause. These major effects will, however, need to be subtracted from risk metrics when preparing ‘pure’ climate change impact reports, for example, for investors and regulators. How to do this has yet to be established and will doubtless provide future opportunity for innovation.

SO WHAT?

“It is recommended here as essential background reading for anyone involved in climate risk assessment in insurance”


64% OF CONSUMERS WANT BRANDS TO REDUCE PACKAGING

DATE PUBLISHED: MAY 2021

AUTHOR: DELOITTE

WHAT IS IT?

Sustainability remains a key consideration for consumers in 2021 with 32% of consumers highly engaged with adopting a more sustainable lifestyle

Equally important, 28% of consumers have stopped buying certain products due to ethical or environmental concerns.

These are some of the key findings from the Deloitte survey on consumer attitudes to environmental and ethical sustainability.

SO WHAT?

Staying on top of changing consumer sentiment is key to business success and businesses need to plan for ways they can make their products more sustainable and build accountability into their value chain.

The trends are that this is an area which is growing in concern and interest and therefore something that should be on all business agendas.

For those ahead of the game, it can be a key way to differentiate, especially in a competitive market.

“Businesses need to plan for ways they can make their products more sustainable and build accountability into their value chain”


Have you seen another publication & want the summary and “so what” for? Then please get in touch and let us know!

What else do we do?

We organise debates on climate change financial risk! Join us! Read our blog post from our previous event on “Climate-Related Risks – When Will It Be Too Late for Financial Firms To Act?”

Thanks for reading, 

Kelly

Contact us: Kelly Coombes, Think Tank Leader  kelly.coombes@climate-rs.com

Further reading:

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