Climate risk management still maturing, survey finds
Climate changeArticleSeptember 30, 2024
Risk managers are making strides in embedding approaches to climate-related risks into enterprise-wide risk management frameworks, but a reluctance to invest in such efforts is slowing their progress, a recent survey reveals.
StrategicRISK’s online survey of 103 risk managers from around the world posed a number of questions on how organizations are mitigating climate-change risks. The anonymous survey, which was sponsored by Zurich, gathered responses from a broad range of industry sectors in Europe, Asia Pacific, the Americas and the Middle East and Africa.
The survey found that 11% of risk managers felt that managing climate risks was part of their organizations’ enterprise risk management approach, up from 3% in 2023. And, 91% felt climate change would have a significant or some impact on their operations over the next decade.
Only 24.8% in this year’s survey felt their approach to measuring and monitoring the potential impact of climate change was mature. And while 49% said their approach was improving, that is well down from 69% in 2023.
Resource scarcity
The biggest stumbling block to developing enterprise-wide risk management approaches to climate risks is often a lack of resources, according to Annacel Natividad, Chief Risk Officer for Aboitiz and President of PARIMA.
“This is something I am experiencing now,” Natividad says. “Addressing climate risk requires significant investment in new technologies, whether that is in updating legacy equipment or transitioning to biomass-friendly energy.”
“This is on top of any infrastructure or process you may need to implement within the organization,” Natividad adds. “Any organization, especially those facing financial constraints, may struggle to allocate sufficient resources to these areas.”
While a lack of resources is challenging for some organizations, it doesn’t mean the risk manager’s role is any less important in managing climate risks, according to Franck Baron, Group Deputy Director, Risk Management and Insurance at International SOS and President of the International Federation of Insurance and Risk Management.
“The climate agenda provides risk managers with the long-term horizon that we are all fighting for”, Baron says. “It puts them in the position to consider how can I make a difference, how can I help to protect, secure and sustain my business over the next 10 to 15 years?”
Investing in resilience is a proven way to take on some of these long-term climate-related issues.
Zurich’s charitable organization, the Z Zurich Foundation, created the Urban Climate Resilience Program (UCRP), a global initiative formed to tackle problems caused by climate change in dense urban environments.
The UCRP collaborates with organizations in nine countries, including local Zurich Insurance Group business units, to help build community resilience. A four-step methodology is used to identify vulnerable communities in need of tailored solutions to strengthen resilience, work that is done together with public and private sector agencies to develop viable long-term climate-risk solutions.
Risk awareness is high
Organizations’ boards and executive management are largely aware of the seriousness of climate risks, with the survey showing 73% are very engaged or somewhat engaged in managing the threat.
Climate risk is considered a strategic priority by many organizations, Natividad says, with boards more likely to discuss the subject as part of their oversight responsibilities.
As a result, there is an opportunity for risk managers to broaden their involvement in managing the risk, she adds.
“There is a growing trend of boards seeking members with expertise in climate science, sustainability or even risk management, particularly among publicly listed companies and those such as energy companies that are directly impacted by climate change”, Natividad says.
Just more than half of the respondents said their organizations have someone within the risk management function who is dedicated to sustainability and climate risks.
Not all risk managers believe that is a good idea.
“To me, there is very little value in having a separate sustainability resource within the risk management function,” says Volkan Can, Enterprise Risk Manager at cement producer ÇİMSA in Turkey. “Our role is to evaluate all the risks. And most risks will, to some extent, link to sustainability.”
What’s driving organizations’ approach to climate risks? Not surprisingly, says Karla Gahan, Head of Resilience, Risk Advisory and Analytics at Barnett Waddingham LLP, fear of legal action is the biggest motivator.
Survey respondents said that apart from the threat of legal action, supply chain concerns and climate-related losses also weigh heavily as reasons for addressing climate risks.
“Threat of legal action is unsurprising as being at the top of the list, as there are several associated consequences,” Gahan says. Reputational damage, significant costs, loss of business, and, depending on the size of the organization, negative impacts on share price could all come into play, she adds.
Insurers play a positive role
Risk managers considered the role of insurer services to support companies to mitigate climate-related risks, with most agreeing in the survey that they are at least somewhat important.
On a sliding five-point scale, 28% said it is extremely important for insurers to provide such services. The percentages declined from there, with 13% saying that insurer involvement is not important at all.
While the scores overall indicate positive sentiment towards insurer support, the percentage saying it is extremely important should be higher, Can says. “We are directly affected in my company by severe weather conditions,” says Can. “Our insurance premiums rocket as a result. This will be the case for many organizations like mine that are directly impacted by extreme weather conditions.”
Zurich believes insurers can play a significant role in helping boost resilience against the impacts of climate change. In its work with L’Oréal Groupe, Zurich Resilience Solutions helped identify material climate exposures that could impact operations and develop a climate adaptation plan that fit with the company’s overall sustainability strategy to protect its global assets.
Christine Gendrot, Insurance Director at L’Oréal Groupe, says her company realized the value of collaborating with Zurich Resilience Solutions.
Considering Zurich Resilience Solutions' expertise in climate adaptation work, we knew they could provide a high level of data-driven service in a comfortable, collaborative approach.
A need for new products
Can says the insurance market should develop new ESG insurance products, which could be a reason some of the survey scoring around insurer involvement is low.
Natividad agrees. Modelling and other tools can help insurers arrive at fair prices based on an individual organization’s risk profile, she says, adding that “this should take into account any internal risk-reducing initiatives and not just model prices based on the country’s risk. I always challenge our insurers because they play a crucial role in mitigating climate risk by leveraging their risk management expertise.”
This article is based on the content of the StrategicRISK Special Report on Climate Change published on September 30, 2024. Download the full report here.
