How risk and insurance supports sustainability

When you think of cutting carbon emissions, you would be forgiven for not immediately thinking of insurance as being a key decarbonising force. 

Instead, the narrative especially in the media tends to focus on things like tax breaks, government subsidies, bans, and corporate divestments of carbon assets.

However, the world’s largest insurance and re-insurance companies, not to mention investment banks like Goldman Sachs and asset managers like BlackRock, are playing a relatively low key yet important role in helping the global business community cut carbon emissions.

This is happening as more countries set deadlines by when they aim to achieve ‘carbon neutral’, with giant economies like China (one of the largest CO2 emitters) recently pledging to do so by the year 2060.

In the energy sector, many oil and gas companies are trying to reposition themselves as renewable leaders, though there are still a few exceptions that remain committed to remaining in their historical areas of expertise in fossil fuel extraction.

The move towards sustainable alternatives include key technologies like wind, solar, and hydro, and to a lesser extent geothermal and biomass.

Surviving the transition

As this transition gets underway, legacy energy companies will enjoy a by-product: benefitting from a more competitive insurance market for renewables, with more attractive policy pricing or terms offered by a range of insurers vying for ‘green’ business.

We are already seeing clear signs of the market for fossil fuel intensive infrastructure entering a sustained ‘hard’ phase, which started earlier in the decade and is now accelerating.

This is the opposite of the ‘soft’ market for renewables in which competition to underwrite risk is high and companies can benefit from lower insurance premiums.

Due to shareholder and public pressure to deliver more carbon-friendly operations, free capital market dynamics are taking over.

Both institutional and retail investors are reducing their involvement in fossil fuel industries that seem set on a downward spiral of increasing regulation and ballooning costs.

Indeed, the realisation that expected returns over the coming decades has tipped firmly in favour of renewable technologies, coupled with mounting public opinion pressure, has led to political parties around the world pledging green agendas on the campaign trail to strike the right note with voters.

It not only makes political sense to champion sustainability, but increasingly it makes economic sense too.

To achieve this transition, energy companies need partners and advisors that can help them make the move to a renewable future – in a way that rewards both shareholders’ sense of ethics and their pockets.

Amid all this change, replacement cost assessments for renewable energy infrastructure such as solar panels and wind turbines presents a rapidly expanding market opportunity.

Growing demand for green underwriting

As with any new asset type, there is considerable upfront investment required to buy the technology, secure facility locations, and create the right base ground conditions (ie site levelling).

During the formative years of this green boom, many governments provided (and continue to provide) lucrative grants, subsidies, and tax breaks for manufacturers and operators.

While the cost of solar and wind energy generation is already on a par or cheaper than fossil-fuel and nuclear power (despite some of the financial incentives being phased out and thereby pushing up reinstatement costs), green R&D and public support will ensure the outlook remains favourable.

Taking into consideration the evolving incentives, global trade trends, price changes, and variations in technologies, renewable energy facilities have seen significant reductions in replacement costs over a relatively short period of time and we expect this to continue.

This means owners, insurers and financiers of renewable energy facilities should review their sums insured and valuation surveys may need to be conducted frequently, especially for larger complex risk sites.

Equally, fossil fuel heavy facilities are seeing increased scrutiny of their risk management procedures by insurers and financiers.

We believe this is only the first stage of what will be a multi-decade transformation of the energy industry towards achieving carbon neutral goals.

The insurance sector, including independent assessors of asset reinstatement costs that work behind the scenes with insurers and asset owners, will continue to play a key role in reducing global carbon emissions.

Andrew Slevin is chief executive officer of John Foord