The risks and opportunities of the path to net zero: why risk managers play a critical role

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Managing risks to seize opportunities

Climate change presents a “dual challenge” for organizations, according to Justine Kelly, Head of Sustainability, Zurich Commercial Insurance and Group Underwriting, both of which demand a clear and collaborative response from risk professionals and insurers. Kelly spoke in a webinar hosted by Commercial Risk’s Sustainability Risk Review together with Valentina Paduano, Vice-President and Chair of the Sustainability Committee, FERMA and Chief Risk & Compliance Officer, Dedalus Group.

First, explained Kelly, organizations must improve their resilience to the physical disruption from intensifying weather patterns, mitigating the risks both to their core business and supply chains. She noted that the economic impact of climate-related events such as flooding, storms or prolonged drought, is already rising, with total natural catastrophe losses reaching $320 billion in 2024.

Second, they must navigate the risks inherent in the business transformation required to reach net-zero emissions. Some business models will be fundamentally altered and the associated risks are significant. A fluid policy landscape, climate-related litigation and the rising cost of raw materials are just some sources of potential risk.

Companies that navigate these risks successfully could open up major strategic opportunities but this requires coordinated management of risks and investment. Early movers can gain competitive and market advantages while aligning their brand with changing consumer preferences, explained Kelly. Meanwhile, a low-carbon business model will achieve long-term efficiencies and cost reductions as well as benefiting from regulatory and fiscal incentives.

Mapping the transition pathway

A detailed plan for managing the transition is key to turning the risks into opportunities, but what does an effective plan look like and what is the role of the risk manager? “The transition pathway of a company will be unique,” Kelly said. “It requires tailored, specific and proactive risk management.”

Individual transition plans will be shaped by an organization’s particular geographical footprint, value chain and business model, and take into account its own specific mix of energy sources, she continued. The risk manager’s response must be “holistic” and consider the interplay between the physical and transition risks of climate change.

Businesses must also prioritize flexibility to cope with constant changes, especially in policy, regulation and technology, Kelly advised. Understanding how fast to move along the path to carbon neutral is one of the most important – but most challenging – questions facing companies, and demands an agile approach.

Take the shift to sustainable technology, Kelly noted by way of example. This will be a core component of most transition pathways, but often the technology is new, untested and expensive. This leaves companies vulnerable to a range of potential risks.

“Talking from personal experience with some of our customers, the challenge is often finding the sweet spot of when to make the next [technology] step in their transition journey,” she said. “The technology may be available, but when does scaling makes sense? That’s what I mean by being adaptable. We need to be ready to move to the next step.”

The shifting sands of regulation

The complex and ever-changing regulatory landscape is another key challenge facing organizations transitioning to net zero, said Valentina Paduano.

In Europe, for example, there has been a proliferation of directives aimed at achieving the targets set out in the European Green Deal, including the Corporate Sustainability Reporting Directive, Taxonomy Regulation and Corporate Sustainability Due Diligence Directive, she said.

The encouraging news is that the EU’s proposed Omnibus package – which aims to simplify and reduce EU sustainability reporting requirements – should streamline the regulatory landscape. When implemented, it aims to bring alignment and diminish the administrative burden of climate regulation.

Nevertheless, the regulatory outlook globally remains uncertain: “There is more change to come, that’s the only certainty. It’s our challenge as risk managers to make sure we are appropriately equipped and flexible to adapt,” said Kelly.

However, climate-related regulation should not be the main driver of change within an organization, Paduano cautioned. Instead, use it as an opportunity to promote long-term sustainability goals, she said. It is a chance to position your company “as a leader in a new era of corporate transparency.”

The risk manager’s unique perspective

While many risk professionals may not see climate and sustainability as their natural domain, the panel agreed that the risk management profession, with the support of the insurance industry, is well-placed to play a leading and strategic role in the transition to net zero.

“The role of the risk manager will be critical,” said Kelly. Risk professionals' core skillset includes the use of disciplined, integrated risk frameworks and risk and scenario analysis, she added. They have a unique vantage point to understand the pain points across an organization and its supply chain.

“Some of the risks and topics are very often beyond the scope of what a risk manager would be involved in,” Kelly continued. “But I think risk managers have valuable insight and access to data that could support the business in managing the risks and opportunities of the transition.”

This is recognized in the regulatory landscape, added Paduano. The risk-based approach underpinning many of the EU climate directives emphasizes the central role that risk managers can play. “It puts risk managers at the heart of the response,” she said.

“Credibility and reliability must be elevated”

The FERMA Global Risk Manager Survey 2024 highlighted the growing prominence of the risk management function at the strategic level and growing responsibilities beyond risk management, Paduano noted.

For example, risk professionals are already having a rapidly-growing influence within Environmental, Social and Governance (ESG) roles, with the number of risk managers involved in assessing ESG-related risks up 22% in just two years.

“The focus is now on adaptation to, and no longer mitigation of, climate risk and this is an important development,” commented Paduano. “This means that risk managers play a key role in the climate resilience process and it must be recognized at the top level of the organization.”

However, to truly raise the risk manager’s profile and establish their voice at the board level, some risk professionals will need to upskill, she believes.

“This means risk managers must be able to elevate their competence and their skills to maintain this kind of strategic conversation with senior management. Credibility and reliability must be elevated. There is still more to be done for risk managers to establish their role in the board room.”

Focus on the skillset of the entire team, not just on individual risk professionals, Paduano advised: “We should invest in more diverse risk management teams. That means extending the competencies and the skill of our team in order to cover the different perspectives. Only in this way will we be strategic.”

Mind the (insurance) gap

Turning to the role of insurance, the panel agreed that insurance support will be essential given the financial magnitude of the risks associated with the transition to net zero and the scale of investment needed to mitigate those risks.

However, a key concern of risk managers is that getting adequate cover for climate-related investments at an affordable price is “proving difficult”.

Indeed, the annual climate protection gap stands at $200 billion globally and continues to widen. Meanwhile, according to FERMA research, around 50% of risk managers believe that some key business risks are becoming uninsurable as a result of climate change.

A lack of historical data, especially for new sustainable technologies and materials that underpin the transition such as solar panels, wind farms, hydrogen fuel and storage as well as new construction techniques is one of the major obstacles to underwriting climate-related investments. But there are also specific barriers, said Paduano. For example, insurers can be reticent to provide cover for companies due to past activities related to coal or mining.

Zurich believes that governments, insurance companies and businesses must set an agenda to address the gap in coverage.

At a policy level, we need intervention in three areas, Kelly explained: prioritizing prevention and climate adaptation measures and resilience strategies in national planning; support for efficient insurance markets to manage extreme events; and the development of risk sharing solutions such as public / private partnerships to ensure insurance affordability and market stability.

Breaking down insurance barriers

At the same time, the insurance industry must find ways to break down the prevailing barriers to underwriting sustainable technologies, argued Kelly.

For Zurich, early engagement with emerging technologies and climate-related solutions has proven an effective strategy for developing insurance solutions and supporting its customers in the absence of robust historical data.

Kelly cited the example of mass timber, a form of sustainable engineered wood that is establishing itself as a viable alternative to steel and concrete in the construction of large commercial buildings in the US. It has been used since the 1990s but the market has been slow to scale.

Recognizing the need for greater insurance support, Zurich took a pioneering approach by working closely with the construction industry and participating in early testing and simulations. This process gave Zurich a deeper understanding of the mass timber industry and the risk profile of its customers, from which it was able to offer early-stage insurance capacity. Zurich now stands as one of the leading insurers of mass timber in the US.

This approach of working with customers and industry bodies to understand the risks of nascent technologies is vital to supporting business’ transition pathways:

“It’s because we lent in early to understand the risks and because we collaborate with companies to jointly understand the new transition technologies that we’re in a position to offer the appropriate covering expertise,” Kelly observed.

Invest for resilience

Ultimately, the scale of transformation and investment required in the global transition to net-zero emissions is so vast that there is no one single solution. Businesses, insurers and governments will need to collaborate, share data and find practical solutions.

To that end, Zurich is engaging with its customers to understand their needs and priorities around their net-zero transition, “so that we are then in a place to offer the right kind of expertise and climate-related solutions,” said Kelly.

For risk professionals, the challenge is to have an “open mindset”, according to Paduano. While risk transfer will play a major role, in some areas risk prevention and risk mitigation will prevail over insurance.

“We need to understand in which are the actions we can invest and use the knowledge and competencies of our insurer, or how we can invest to become more resilient,” she said.

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