Insurers advised to consider risks as businesses adopt greener practices

Insurers Encouraged to Assess Risks as Businesses Shift to More Sustainable Practices

What does moving towards a sustainable, low-carbon future entail for businesses?

As more companies embrace environmental, social, and governance (ESG) standards, they face numerous new challenges and responsibilities. This includes adjusting to changing regulations and evolving stakeholder expectations, as well as reevaluating their insurance needs in the face of increased climate-related physical and transitional risks.

For today’s businesses, adopting sustainable practices is not just a moral decision but a strategic necessity. Directors and boards are tasked with balancing immediate financial objectives against the imperative of long-term sustainability. This balancing act is driven by looming legislative and regulatory shifts, alongside a rising demand from investors and the public for heightened transparency and accountability on environmental and social fronts.

Governance plays a pivotal role in weaving ESG considerations into a company’s strategic framework. Effective governance provides the necessary oversight and ensures that operations align with wider sustainability targets.

Insurance in the Era of Sustainable Transition

Regulatory changes often require businesses to rethink their operations, impacting everything from supply chains to company policies. According to insights from Arthur J. Gallagher’s blog, such transformations can trigger increased insurance premiums, escalated financing costs, and the need for specialized external services to comply with new regulations. For example, integrating low-carbon technologies introduces novel risks that necessitate different management and insurance approaches.

The case of Sara Lee in Australia illustrates the risks that ESG factors can pose to supply chains. A strike at a supplier’s plant, combined with transportation snags and severe flooding, led to critical shortages of essential supplies like cardboard packaging, eventually pushing the company towards administration. This underscores the importance of strong supply chain management and the concept of “double materiality,” which involves considering both how sustainability affects a business and how the business impacts sustainability.

As enterprises shift towards greener practices, their insurance needs evolve too. Moving to low-carbon operations not only offers new possibilities but also introduces new risks, which require updated insurance solutions to address these emerging challenges. It is vital for companies to work with insurers who grasp the nuances of sustainability risks and can provide customized insurance options. Understanding and managing the risks linked to sustainability initiatives is crucial.

Experts advise that companies maintain a focus on long-term strategic planning with definitive, science-backed climate objectives. It’s important to involve all organizational levels in these strategies to sidestep issues like greenwashing. Additionally, it’s recommended that governance frameworks be reassessed to ensure they are strong enough to manage these new demands, incorporating climate and sustainability considerations into regular board discussions and decision-making.