Change in underwriting practices key to achieve net zero: Kennedys

Changing re/insurers underwriting practices is key for businesses’ net zero transition, according to a recent report by global law firm Kennedys.

The report, titled ‘Rewriting the risk: Addressing the challenges of climate change’, focuses on the ‘environmental’ pillar of environmental, social and governance (ESG) considerations.

It also considers the impact of climate change on insurers; how to mobilise insurance markets to mitigate climate risks; value chain risk arising from climate risk; and the growing trend of climate litigation risk.

Kennedys observed that businesses are reacting to the challenges posed by environmental factors, which in turn is mobilising insurers to reassess their own operations and increase efforts to demonstrate climate leadership.

The report identified three main types of climate litigation which brings Directors and Officers (D&O) and Errors and Omissions (E&O) insurance into focus.

These include lawsuits targeting states challenging the adequacy of climate policies, as well as lawsuits that target companies over their emissions of carbon dioxide, alleging climate-related harms.

Other litigation strategies include activist shareholder and employees, including with regard to misleading environmental promises (greenwashing) and non-disclosure of climate-related risks.

Kennedys found two major developments compounding pressure as companies transition towards sustainable practices.

First, a climate change ‘duty of care’ is owed by public and private actors, which is already being tested when establishing causation.

As with the ‘duty of care’, shareholder activism is also on the rise and is set to drive a change in corporate behaviour.

Individuals and NGOs are increasingly using the court to try to achieve their objectives, Kennedys noted, including enforcing board responsibility with regard to corporate compliance with regulations, targets and broader environmental principles.

Kennedys’ report recommends six strategic recommendations for re/insurers and their clients to adopt in order to identify and stay ahead of climate risks; as well as to reduce the likelihood of environmental liability claims made against them.

These include to embed climate mitigation within governance changes and senior leadership and to advocate enhanced annual climate emissions disclosures, to include data on specific emissions sources and associated biodiversity risks.

Also, to develop extended net zero plans which consider climate impacts across the business value chain, incorporating sustainable procurement policies and to reduce its emissions by implementing and disclosing details of decarbonisation measures.

Additionally, the firm advises to take steps to ensure conduct is fully compliant with objectives and insureds do not make misleading statements or pledges in the rush to adopt sustainable practices.

Finally, Kennedys’ report recommends seizing the opportunities in green technology, green building and renewable energy.

Commenting on the report, John Bruce, partner, said: “The growth in sustainability and climate-related issues impacts on all types of insurance policies for the simple reason that climate risks are a constant, growing concern.

“From an underwriting perspective, changes in practice will be required to price climate risks more accurately in the future. Re/insurers (and the businesses they insure) that are ahead of the transformation game, like those at the forefront of the industrial revolution and the move to a digital economy, are much more likely to succeed.”

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