How to weather the dual challenge of climate change and the net-zero transition

Companies today face a dual challenge. They must act urgently to decarbonise their operations to help mitigate climate change, a complex and all-encompassing transition.

At the same time, climate change is not a distant threat. It is already playing out, such as in the form of increasingly disruptive natural disasters that are impacting communities, businesses and supply chains, demanding a focus on resilience. According to EU’s Copernicus Climate Change Services (C3S), 2024 is set to be hottest year on record, which makes climate action more urgent than ever.

Risk managers are well positioned to help steer the course towards a net-zero economy, whilst managing risks arising from the transition itself and climate change.

Early collaboration between risk managers and insurers can provide valuable support to manage the new risks posed by the transition. These relationships can also be used to build resilience to climate risks.

The transition challenge

Recognizing the urgency of addressing climate change, companies across all sectors are developing clear plans for their role in the net-zero transition, driven by their own commitments, alongside the expectations of customers, investors, and governments. According to Zurich's survey of executives, 77% had established a transition strategy by 2023.

Such planning is essential. The transition to a net-zero economy requires major transformation as almost every aspect of how we design, build, power, transport, use, re-use or recycle goods will need to change. Companies across all sectors are investing in removing carbon from their operations, value chains, products and services by using lower-carbon energy, processes and materials.

These investments pose new risks as sometimes nascent technologies and solutions are introduced. Insurers can play a key role in supporting customers across every aspect of the transition, from helping to scale up clean energy generation to supporting demand-side solutions for large users of energy. As with any dialogue, information flows in both directions: insurers listen and learn about the specific net-zero transition challenges customers face. By understanding their needs, insurers can offer the right kind of expertise and solutions to support their transition.

The key is collaboration and early involvement to collect data and understand the risks, starting conversations about transition plans from a position of cross-cutting knowledge. It is beneficial to have both risk management and sustainability expertise at the table to have a more holistic perspective on the transition.

Unlocking investment in transition technologies

This transition depends on cleaner or new green technologies and processes reaching the scale needed to replace fossil fuels. But new approaches bring new risks, which can make them hard to invest in and deploy. One example of a nascent solution is clean hydrogen, which has the potential to become an important source of low-carbon energy. However, this potential has so far been unfulfilled: the International Energy Agency notes that faster action is required to unlock the investment needed to scale up hydrogen production and bring down its costs.

Part of the challenge is that the use of hydrogen gives rise to a different set of risks compared to oil and gas, which can make companies hesitant to commit. To address these risks, and unlock investments in hydrogen projects, insurers can work with their customers to develop and offer new insurance solutions. For example, Zurich has worked with Aon to create a comprehensive new insurance facility that covers projects using green and blue hydrogen.

Other supply-side energy technologies where insurance can help industry to reach scale include wind, solar, geothermal, and carbon capture. Insurers can also support a range of innovations to reduce energy use, in energy-intensive sectors such as steel, transportation and construction. For example, Zurich provides cover and risk engineering for a large steel manufacturer’s sites, where greener steel-making processes are used, such as direct reduced iron technology, using green hydrogen, and electric arc furnaces.

Another example of an industry prioritising its decarbonisation is the building and construction sector, which accounts for some 37% of global emissions. One promising new technology is mass timber, a material made from layering wood and adhesives that is less carbon-intensive than steel and concrete. Companies may be concerned with fire risks associated with timber, however, tests have shown that when a mass timber element is exposed to fire, the outer surface burns and develops a char layer. This outer layer of char insulates the inner core of the timber element and helps protect the structural integrity of a mass timber building.

An open and ongoing conversation between insurers and customers, backed by risk management and sustainability expertise, can solve this kind of challenge. For example, after observing the fire tests, Zurich has become the leading insurer in the United States of buildings made from mass timber, including insuring the largest mass timber campus project in the country.

Building resilience while navigating the transition

While transition risks are challenging enough, they should not be approached in isolation. Insurers can also help customers prevent and reduce climate-related risks, and help them build back better after a loss to improve resilience.

Risk experts perform detailed assessments at portfolio and site level for customers to determine the criticality of assets and operations, and prioritise locations. Based on this assessment insurers can provide risk expertise through boots on the ground, recommending risk management solutions to enhance climate resilience. For example, Zurich helps customers anticipate and adapt to future climate risks by combining their data with Zurich’s to provide a detailed analysis of their exposure and vulnerability, based on different climate scenarios and time horizons, and actionable options to minimize their risks.

Insurers can help customers to design projects which consider all angles of the climate challenge, weighing up the risks and opportunities. There are many factors to consider on both sides of the equation. Cultivating resilience in its own right can be a complex challenge, encompassing physical risks as well as the needs of local communities. Zurich worked with an automotive manufacturer, for example, to construct inflatable barriers around a production plant in Germany to guard against flooding without diverting the water onto surrounding properties. In northern Europe, annual precipitation and heavy rainfall are predicted to increase, making such foresight vital for future resilience.

The path ahead

With the World Meteorological Organization warning of record levels of atmospheric CO2, locking in years of disruptive climate change, the challenge facing risk managers is substantial, multi-faceted, and urgent.

Whether it is enabling a new generation of wooden buildings or ensuring a business can keep operating when flood waters rise, insurers can help risk managers to mitigate transition risks while building resilience.

As the speed and complexity of the transition increases, insurers must step up this engagement with customers. Zurich, for example, is eager to collaborate with customers in their transition efforts. This will nurture the in-depth understanding needed of the technologies, barriers and interdependencies involved in their industries’ transition. Grounded in this understanding, insurers can offer the expertise and solutions needed, at the scale needed, to meet evolving customer needs and support their transition journey.

Originally published in Commercial Risk on December 10, 2024.