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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, an S&P Global podcast where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape.

Esther Whieldon: We've been talking a lot on this podcast recently about the intersection of climate in nature. For many years, conversations about the E in ESG or the environmental topics were all about climate. Many companies have crafted climate-related strategies and have taken steps to measure and manage their climate-related risks. But when it comes to nature, many companies are only in the early stages of understanding how this topic fits in the equation.

Lindsey Hall: That's right. But nature has been steadily climbing the sustainability agenda in the past year as stakeholders become increasingly aware of how climate change and nature are inextricably late. For example, nature took a more prominent role at Climate Week NYC in 2023, and it was a huge focus at COP28, the UN's annual Climate Change Conference that took place in December 2023.

And as we covered in last week's episode of the podcast, nature was a big topic of discussion at the Annual World Economic Forum meeting that just took place in Davos, Switzerland. The World Economic Forum's Global Risks Report released right before the event listed environmental topics like extreme weather events, biodiversity loss, and ecosystem collapse as some of the top risks for society in the next decade.

In last week's episode, we heard from the Global Chief Sustainability Officer of Insurance and Financial Services Company Manulife. And she talked to us about how the company is approaching the joint challenge of climate change and nature in its business. Well, today, we're going to dive further in and look at how the insurance industry is managing these interlinked crises and also what solutions it's bringing to the table?

Esther Whieldon: In many ways, the insurance sector is at the front lines of climate change. Their investments face climate risks on the asset side of the balance sheet, and they face underwriting risk, particularly in the property and casualty line on the liability side. To understand more about how the industry is getting to grips with both climate change and nature are bringing in our colleague, Jennifer Laidlaw. She's a member of the Thought Leadership team at S&P Global Sustainable1, and she's a regular contributor to this podcast. So Jennifer, welcome back. Who did you speak to?

Jennifer Laidlaw: Thanks for having me again. So I spoke to Rebekah Clement, who is Corporate Affairs Director at Lloyd's of London. Just for a bit of background, Lloyd's of London describes itself as the world's specialist insurance and reinsurance market. It's basically a place where buyers and sellers of insurance conduct their business and its members form syndicates to ensure risk. It has a pretty interesting history actually. It started out as a coffee house in London, popular with shipowners and sea captains in the 17th century, and it became the place for ship merchants to purchase insurance against the perils of the sea. And even today, a lot of this business is still done face-to-face.

Lindsey Hall: Okay. Well, so a lot of back story here, as it relates to insurance.

Jennifer Laidlaw: Yes, exactly. And just for another historical factoid, Lloyd's market actually insure the Titanic, but let's get back to the present day. Lloyd's has just wrapped up consultation on the role of insurance in the transition to a low-carbon economy. So I thought it would be a good place to start. I began asking Rebekah, how Lloyd's is working with its members to make them more aware of climate change and what kind of risks insurers are facing in terms of climate change and biodiversity.

Rebekah Clement: When we are looking at Lloyd's, we are a global marketplace, and we serve the interest of many millions of policyholders all around the world. And we have to think about climate as part and parcel of the risk profile that our marketplace provides insurance products for. Now climate is something that we have been looking at for multiple decades. And if you consider, in fact, that in 2022, natural disasters caused $313 billion of global economic costs. That is an enormous amount of challenge that represents the global economy and how can we provide a level of resilience and a level of risk protection around some of those growing risks that we're seeing.

When we're looking at our marketplace itself, we are thinking through how we can ensure the transition. If 90% of the global economy is signed up to net zero by 2050. That means we are going to see significant transformation of industries those we work in partnership with to provide their insurance solutions. What are they going to need as they transition to lower carbon business models?

So all of this is in the realm really as to how we think about our role and our value proposition and supporting and providing risk protection and insurance coverage to the growing and evolving needs of our policyholders around the world and our marketplace are all specialized in their own individual products and services that they provide. We have over 100 different businesses operating in our marketplace. And each one of them is, got a sustainability strategy in place, that's something that they have put in place over a number of years, and I think they are each looking at where they prioritize, what they prioritize, and how they provide the right products and services within their own specialisms and equally able to meet the demands of their customers.

Jennifer Laidlaw: She then went on to explain why Lloyd's had decided to undertake its consultation, which closed on January 31st.

Rebekah Clement: Last year, we were considering how we look at a global marketplace and what are some of the unique, I suppose, journeys that the marketplace will have to go on considering that we operate in multi jurisdictions around the world. And obviously, many companies are grappling with this challenge. And one of the key things that we do for Lloyd's is working with our marketplace to determine the right approach for some of these evolving challenges with respect to how do you respond to the reporting and disclose requirements, for example, that are being put in place around the world.

So the introduction of our 3-year road map and this consultation is really to set out where we think regulation disclosures may go over the course of the next 3 years and beyond. And what is the right framework for our global marketplace in respect to getting our arms around that and ensuring that we are well set up to answer those questions.

So the consultation itself is really trying to look at the framework around which our market invests its assets, the framework around which our market looks at is underwriting activities, and also looking at the operations of those businesses that operate in our marketplace.

Jennifer Laidlaw: I also asked Rebekah how Lloyd's was integrating climate in nature in its work. You'll hear her mention that TNFD. That stands for the Taskforce on Nature-related Financial Disclosures, which has developed a framework to help businesses assess and disclose their dependence and impacts on nature and to identify nature related risks and opportunities.

Rebekah Clement: Clearly, the 2 are inextricably linked, and it is so, so important that we're looking at both of them in the round. I'd say that we are more advanced with respect to how we're looking at climate versus biodiversity. But ultimately, we need to really focus on how we can advance nature within what we do.

Now obviously, we support frameworks such as TNFD, and this is an important part of really looking at how we embed nature and biodiversity risks within our overall framework or as an insurer within their own risk framework. And there is a lot of work to do there, particularly on data as to how we grapple with understanding and pulling and nature and biodiversity-based data to make decisions.

And I think at the moment, we're at the beginning of that journey, whilst we're further ahead with respect to climate, we need to very quickly understand how we can play a positive role in supporting nature and biodiversity.

Jennifer Laidlaw: I also spoke to Regula Hess, who is a senior adviser for Sustainable Finance of the Worldwide Life Fund in Switzerland. She was one of the authors of a report published in 2023 on how insurers can address climate and biodiversity risk. Here she is explaining why insurers need to integrate climate and biodiversity.

Regula Hess: Climate change is really fast becoming the biggest threat to nature. And to give you an example, we have seen these devastating wildfires in Canada. And of course, this kills a lot of animals, this destroys habitat.

At the same time, nature is also our biggest ally when we are fighting climate change. For example, in 2019, nature absorbed more than half of the human-made CO2 emissions. This capacity of nature to really contribute to our side and against climate change is currently diminishing because we are destroying nature. And therefore, it's so crucial to rebuild it. And therefore, we argue that it's important for insurance companies when they assess whether a certain activity they insured might be damaging, they should look at an integrated perspective from climate change and by a diversity perspective.

Lindsey Hall: Regula also talked about how climate change and biodiversity loss are tied to risk management of insurance underwriting.

Regula Hess: There, I would like to give you the example of the drought in Uruguay. The drought led, for example, to over $1 billion losses in agricultural harvest. And now we could try to determine what percentage of this drought was caused by general climate change due to the greenhouse gas effect versus the more local climate change that has been going on in this area due to the destruction of the Amazon, of the ..., of the Choco all these habitats around that are crucial to produce local way.

So you can't really and distinguish what part of this risk well now caused by climate change by, for example, the burning of fossil fuels or the destruction of the local forests. And therefore, we think that the insurance company also in the risk management, you really need to look at these 2 risks in an integrated way.

Jennifer Laidlaw: WWF jointly wrote the report with audit consulting and advisory firm, Deloitte Switzerland. I also spoke to Marcel Meyer, a partner at Deloitte and Switzerland's sustainability lead for the firm. He explained what steps insurers can take to manage climate and biodiversity risks.

Marcel Meyer: Biodiversity and climate have a lot of interdependencies and in particular, a decrease of biodiversity and these kinds of things actually have a cumulative negative impact on climate change. And again, the worst climate change is getting that again negatively impacts biodiversity, increases negative impact on forests, et cetera. And insurance companies through their practices are actually able to influence both of these topics and therefore, hopefully, create cumulative positive effect.

Jennifer Laidlaw: And what about impacts of the underwriting business on climate and biodiversity?

Marcel Meyer: So negative impacts through underwriting activities can happen in various different areas. It can, for example, be in the underwriting policies on what is underwritten. So if an insurance company continues to underwrite and insure activities of companies that have a negative impact on climate and biodiversity. That is the first and foremost one.

But there are as well, others in terms of how something is insured, the type of product and these kind of topics that have an impact on climate change and biodiversity as well. I think freight shipping and the whole transport sector is one of the sectors that is definitely, should be carefully considered in terms of the practices in terms of shipping, there could be potential negative impacts on marine life, depending on certain routes. Equally, there could be negative impacts just based on old and very polluting vessels to be used. So there's various aspects of it, but I think transport as well as mining, logging or intensive agriculture are the sectors that are highly critical for insurers to consider.

Lindsey Hall: So we heard Regula and Marcel mentioned underwriting. Jennifer, can you explain exactly how that works?

Jennifer Laidlaw: So underwriting is when an insurer evaluates the risks when insuring an asset and decides on the pricing. Lloyd's of London plays a large role in underwriting projects and businesses all over the world. I asked Rebekah what changes Lloyd's members were making to their underwriting business to take into account climate change and biodiversity risks.

Rebekah Clement: I think if we're looking at the challenge that climate and biodiversity represents, underwriters are looking at it through multiple different lenses. First of all is looking at any climate exposures that they might have in their portfolios. And that considers how their portfolios are changing with respect to climate-exacerbated extreme weather events.

And they'll be thinking about the clients that they have, the risks that they are taking on behalf of the clients through providing insurance and also what are the sort of resilience levers they can enforce by being insurers and incentivizing good risk mitigation and good risk management. So that's one side of the equation.

The other side of the equation is actually how do we provide new and evolved insurance products to support the changes and considerations of climate and biodiversity. And so, there are many ways in which we can do this. Our marketplace, for example, have developed a range of products that support, for example, voluntary carbon markets and the growth of these over time. How you mitigate climate impacts associated with flooding and also looking at a fire break whose technology tackles causes and impacts of wildfires.

So there's a lot of innovation happening in our marketplace, not just to address any underwriting exposures with respect to climate exacerbated weather events, but actually looking on the other side as to how we can enable investment in climate technology and ensuring that we are providing the cover that's required for investment into lower carbon initiatives and activities globally.

So I think you have to look at it on both sides rather than looking at, the challenge is actually looking at the opportunity with which we see our marketplace well positioned to respond to. The most important thing that the insurance industry will be looking at is how it can ensure that we remain relevant for the future with respect to the needs of our customers looking at how they protect their investments in low-carbon technologies, for example, or in transition.

And so, we have, for multiple decades being there to support established clean technologies like wind and solar, and these are very well serviced by the insurance industry, but nontraditional renewables like hydrogen. Insurance is growing. And clearly, this will require additional support to match the industry growth projections of our nascent green technologies and also energy like hydrogen.

So there's a clear role for us to play there. There's also looking at things like the energy storage, so batteries and energy storage systems. So today, we do provide cover for that, but those needs are going to look very, very different as more and more renewable energy comes online.

And then looking at how we support the growth of sustainable building materials. So outside of our own industry, we're looking at construction and infrastructure. What does it look like in terms of more sustainable approaches to construction and build, and how we can look at within the claims process, build back better clauses, for example.

So when there is a customer that has an event and they need to rebuild, how can we support through insurance, more sustainable building materials to be used, for example. So there is so much scope here for our industry to be thinking and acting proactively to look at where the investment is going around the world in terms of the transition and which technologies are developing and will be scaled and how we can ensure that we have the right products in place to take on some of that risk to allow the investment to continue to flow.

Jennifer Laidlaw: Rebekah explained that while the insurance industry has a major role to play in providing the investments that can help us adapt to the effects of climate change and biodiversity loss, success can only come from partnerships across industries with policymakers and other stakeholders in civil society.

Rebekah Clement: We have such a vital role to play in enabling investments and providing adaptation and resilience solutions. There are 2 really important parts that we play, one of which is helping communities adapt and build resilience to climate exacerbated extreme weather events, but also that providing that inhibited cover for new products or technologies that support or drive lower carbon greenhouse gas emissions globally.

The other really, really important role we can play is looking at how we partner with businesses, governments and NGOs to introduce solutions that are going to prepare for impacts of climate change and be responsive to them.

And I just want to give an example of one partnership that we've recently launched, which is with the UN Capital Development Fund, and that is around supporting public and private frameworks to ensure that they have access to insurance and to risk expertise so that they are able to invest in key areas that they need to build resilience in and also that they have the right insurance, available insurance capacity to improve their ability to respond to and rebuild following any climate-related catastrophes.

So I think there is a big protection gap around the world that currently exist today that we can support and look at new public private partnerships to help solve. And this is always going to be a cross-sector global challenge that will require industries to work together in perhaps ways that they haven't before.

Having just returned from COP28, it is incredible to see the will and the commitment from the private sector — and that spans multiple industries from companies right around the world who are committed to find those solutions to work together and to do so to drive for concrete action in the near term as well as those commitments that we've all made which seem further out, but are fast approaching.

Jennifer Laidlaw: That idea of partnerships that Rebekah mentioned at the end there is something we've talked about a lot on this podcast. And I'm hearing about a lot on the sustainability circuit. This idea of the need for collaboration across silos to implement solutions to the big challenges the world is facing.

Lindsey Hall: And it will be interesting to hear how insurers will use the solutions we heard about today to drive investments. 

Esther Whieldon: This is something we've been exploring in-house as well. Last year, S&P Global Sustainable1 launched a nature and biodiversity risk data set, and that data set assesses nature-related impacts and dependencies across company's direct operations, including at the asset company and portfolio level. I wrote research on this topic and will include a link to that in our show notes. 

And on that note, thanks for coming in, Jennifer. It was great hearing about this topic.

Jennifer Laidlaw: No worries. It was a lot of fun. always glad to be here.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us a review wherever you get your podcasts.

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

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