Corporations are keenly concerned about climate change. This was one of the conclusions that came out of an earth day conference panel at Wharton School of Business in conjunction with the Initiative for Global Environmental Leadership (IGEL).
The conference was entitled “Business Takes the Lead: How Innovation Will Drive Our Mitigation and Adaptation to Climate Change.” I was involved in the “Innovative Capital Deployment – Helping Business Adapt to Climate Change” panel session with business leaders from other industries.
Our discussion explored the role of capital in climate change mitigation and adaptation and discussed the potential business opportunities and risks associated with climate change and extreme weather-related events. There were essentially two main points that came out of our discussions.
Climate Change is High on Corporate Risk Concerns
Climate change continues to rank among the top 10 corporate risk concerns. Businesses feel a host of climate change concerns, but they tend to center around these five:
- financial risk (in the form of legal liability and defense costs)
- potential fines and penalties
- government or regulatory concerns
- financial disclosure requirements
- reputational risk and public relations surrounding good corporate citizenship
Climate Change Represents a Huge Unknown
Investors and those involved in the deployment of capital don’t like unknowns. They like certainty and risks that can be managed. We demonstrated the supporting role of insurance and how the absence or presence of insurance can either deter or attract investments. In its simplest form, insurance exists to help manage/transfer risk and protect against the potential financial downside due to loss(es) so that businesses feel more comfortable operating and continue to invest in the future.
As one of the world’s largest industries, insurers are best positioned to assess and analyze risk, influence risk reduction behaviors and develop products and solutions to respond to risk (all the while managing their underwriting and investment income risk from loss and setting aside enough financial reserves/surplus to ensure sustainability of their business).
An effective response to climate change requires a combination of emissions reductions coupled with risk mitigation and loss prevention so everyone needs to do their part—including the insurance industry.