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The climate fight is fraught with obstacles. As insurers and risk managers, here’s how we can help

Despite some contentious issues with the speed and form of progress at COP29, solving climate change remains a multistakeholder challenge – and risk managers need to have a seat at the table.

Before attending the event in Baku, I wrote about the four main themes that seemed likely to dominate discussions. The first, financing the transition, proved as complicated as expected. While the pledges for the New Collective Quantified Goal totalling $300 billion a year fell short of many developing countries needs and hopes, it did represent a three-fold increase on previous commitments.

At the time of writing, we await details of the agreement on another key theme we identified ahead of the summit in Baku: funds for Loss and Damage. These will be included in the New Collective Quantified Goal.

Now, the additional climate finance that has been pledged can be paired with private capital to unleash innovation at scale. Thanks to their unique expertise and insight, the insurance industry and risk managers can support this endeavour.

Tailoring insurance to drive sustainable innovation

Discussions in Baku made clear that the insurance sector can play a vital role as we pivot to more sustainable economic practices. For instance, some investors are still hesitant to back technology scale-up projects as they can experience delays in start-up, and therefore delays to generating revenues. When investors are able to insure against the risk of delay, however, they may be more willing to invest. There are other examples of where insurance can give investors the confidence they need to invest in new technologies which are scaling up. For instance, performance guarantees, which compensate the investors in the event that the technology underperforms, can be particularly helpful for new technologies.

Parametric insurance in particular can offer scope for new solutions. Investors in a new solar farm might seek to protect their revenues in the event that the sun shines less than expected using parametric insurances.

Marsh’s Transition Risk Landscape provides a useful framework for identifying when there may be an opportunity for either traditional or innovative insurance products to help unlock transition finance. It also identifies the kinds of risk that insurance cannot guard against, where attention should turn to other solutions such as public finance.

Strengthening confidence in carbon markets

The next priority identified in our COP29 preview were carbon markets – the subject of an early breakthrough during negotiations in Baku. Article 6 of the Paris Agreement in 2015 paved the way for countries to cooperate on trading their rights to emit greenhouse gases, but the market has so far proved challenging to operationalize. In parallel to this, there have been concerns around voluntary carbon markets and the extent to which schemes to offset carbon emissions can be trusted to deliver on their promises.

As a result of the Article 6 agreement, standards in the voluntary markets are expected to improve – stakeholders can choose to align credits with Article 6 standards, making them subject to rigorous traceability, reporting and risk management, and potentially more reliable than non-Article 6 aligned counterparts. Insurance can also play a role in building confidence, by enabling buyers of carbon credits to insure against the risk that a carbon credit they purchase is later deemed to be failing to perform.

Unlocking resilience by mapping and managing risk

The fourth and final theme, financing for climate change adaptation was prominent throughout COP29.

Once again, insurance and risk management can play a key role here, and Marsh’s Adaptation Framework provides a way to think about harnessing and optimizing these tools to prepare for a changing world. As I outlined when speaking at the World Climate Summit event in Baku, we think about adaptation measures at both asset level and system level. Asset-level measures could include improving resilience to protect a warehouse against a flood, for example, or changing working patterns to safeguard workers against extreme heat.

Building resilience at systems level is more complex, but no less critical. It starts with identifying the risks to operations and supply chains posed by often-hidden dependencies on ecosystem services that are under threat from climate change. Water scarcity is one example: Water scarcity is a key challenge in a number of countries, and the hosts of COP29 are not exempt from these challenges, as outlined in our paper exploring the issue in Azerbaijan and the region.

Insurance has a role to play both as part of an organization’s financial resilience and in buying time for an organization to implement measures that improve resilience, such as building flood defences or changing working patterns with heatwaves in mind. The role of the risk manager is critical in building a business case for such investments, by working with insurers and brokers to assess hazards and potential future losses.

Insurance, too, can help to drive adaptation through “build back better” schemes such as FloodRe. A collaboration between the UK Government and insurers, FloodRe requires payouts for flood damage to be used to repair property in a way that builds resilience against future floods. It has reduced losses on at-risk properties in the UK.

Removing barriers to innovation and collaboration

In general, the COP29 discussions showed a growing appreciation of the role of the private sector in general, and insurance in particular, in collaborative efforts to unleash investment in innovation that is needed to mitigate and adapt to climate change. Despite some contentious issues with the speed and form of progress at COP29, solving climate change remains a multistakeholder challenge – and risk managers need to have a seat at the table.

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Podcast

The climate fight is fraught with obstacles. As insurers and risk managers, here’s how we can help

Tailoring insurance to drive sustainable innovation

Strengthening confidence in carbon markets

Unlocking resilience by mapping and managing risk

Removing barriers to innovation and collaboration

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The climate fight is fraught with obstacles. As insurers and risk managers, here’s how we can help

Tailoring insurance to drive sustainable innovation

Strengthening confidence in carbon markets

Unlocking resilience by mapping and managing risk

Removing barriers to innovation and collaboration

Related insights

Risk in Context Podcast: Risk managers’ critical role in climate risk mitigation and adaptation

Insurer Survey Report

Navigating Waterways: Climate Change Implications for the Maritime Sector

Central themes for COP29 and their implications for the insurance sector