Extreme weather events are reported to be costing $5 trillion a year, and with food and water shortages leading to loss of life and destabilisation, there’s more than just economic consequences arising from environmental issues.
So, what can we, and in particular the insurance industry, really do about it? Turns out, quite a lot, and there’s also things not to do!
For part 2 of a series of podcasts, RiskSTOP Group’s Johnny Thomson talks to Kerris Earle from Zing365 about the E in ESG, the environment. Political, topical, and packed with information… you really won’t want to miss this one!
Please note, this episode was recorded towards the end of 2023, a few weeks after the UN Climate Change Conference.
If you would prefer to read rather than listen to this episode, please see our transcript below.
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TRANSCRIPT
Johnny Thomson 00:01
Extreme weather events linked to climate change are expected to lead to global economic losses of 5 trillion US dollars this year. Hello, everyone, and welcome to the RiskACUMEN podcast which offers thoughtful insight around risk management. Now, the figure I've just quoted around economic losses linked to extreme weather and climate change, which comes from the Cambridge Centre for risk studies, is just a small part of the story. Crop failures, and food and water shortages, don't just have economic consequences, but also lead to significant loss of life and destabilisation. So what should we be doing about it? Big Question. Today, I'm joined once again, by Kerris Earle, Training and Development Manager, at Zing365 for the second part of our discussion about environmental, social and governance risk factors, or ESG. This time, we're looking more closely at the E in ESG. Hi, Kerris. Thanks for coming on again.
Kerris Earle 01:08
Hi, Johnny, thank you for having me.
Johnny Thomson 01:10
Absolute pleasure. Now, the environment. Big topic, highly political, of course, as well. But one, which I think most of us are now starting to recognise as a huge intergenerational issue. And also one with, well, quite severe current consequences too.
Kerris Earle 01:29
Yeah, definitely. Climate change is one of, if not, THE most significant challenges that's facing all of us collectively. And if we think it's been reported in the last couple of weeks, that the last decade is now the hottest on record. And the UN Secretary General at COP 28, just a couple of weeks ago, was saying that it's looking like 2023 is actually going to be the hottest year, so far on record, also. So, very much as you've said, out there, in the public conscious at the moment and getting even more press. You can't really get away from it in the headlines, can you?
Johnny Thomson 02:09
No, absolutely not. Right, it's probably good to get behind those headlines as well. And let's just consider the the risk exposure here. It's vast, isn't it?
Kerris Earle 02:20
Definitely. Because it's possessing such collective risk to all of us at once. If we look at it through the lens of insurance, the idea of insurance at the very heart of it is that the losses of the few are covered by the many. And the industry is built around that promise. But when we're looking at climate change, as that global issue, it's something that poses that collective risk, and it is for all of us at once. So we have to adapt how we view it and approach it as that risk. So we are looking at it as risk. And I know we touched on that last time, but it's presenting us with that whole new set of challenges. And that demand for industry expertise, but in new ways. And risk exposure is one of those biggest elements to look at regarding that. So as you touched on that extreme climate related weather events, they are increasing and not only in frequency, but in severity. And it is linked to the climate crisis, we can't get away from that. It is causing these more extreme events. If we think about Europe's Heatwave, this summer, wildfires in Greece, the risks that that posed not only to people, but also businesses or hotels, travel, health, all of the industries that were impacted by that. So it's really sort of far reaching. And unfortunately, we keep being told it is only going to get worse, and it's only going to happen even more. So we are exposed to a lot of risk there.
Johnny Thomson 03:54
Yeah. And it's not just those more obvious physical risks, is it? There's also transitional risk to take into account here as well, isn't it?
Kerris Earle 04:03
Yes, there definitely is. And that is one that is getting sort of more focus now. But the physical risk is very much sort of been dominating the space because obviously we can see what's happening with the extreme, again, weather events and insured assets like property. But that transition on risk, focuses on that move to the more sustainable future. So the risks that actually sit around our lowering of greenhouse gas emissions, for example. So we've got cost and resource, potential fallout from changes in risk appetite. So again, through the lens of insurance, that could be through underwriting but also through investment portfolios. A really good example is moving away from underwriting for non renewable energy, it's now classed as that dirty industry. Which could actually have knock on effects to societal elements. So leading to cost of energy to rise and then you pull in reputational damage, it all sits within that transitional piece. Pulling in that brand and reputation as well when you're getting it wrong and you're getting it wrong publicly. So very much there's more than just the physical.
Johnny Thomson 05:13
What role do you see the insurance industry playing, Kerris? Because you mentioned the ability to cover that collective risk is difficult, isn't it? I mean, even state schemes have struggled around this issue, haven't they?
Kerris Earle 05:31
Yeah, definitely. And one of the biggest challenges is that climate change isn't linear, and it's really unpredictable in nature and it complicates it. And one of the biggest things is, again looking at it through the lens of risk, is damage from it can actually take years to materialise. So whereas we traditionally sort of stress test or create risk models around what's happened in the past, we can't really do that with climate change, we have to plan for potential future events. So we've got to assess those projected impacts on our existing, as well as our new business elements. So it's really pushing that lens forward. But another complication there is that when we're making those predictions, we have to make sure they're sufficiently severe for those worst case scenarios. But we also have to be looking at the lens of making it or keeping it realistic. Because if they aren't, there's just a real risk of making certain risks completely uninsurable, which can further exasperate things like the protection gap. And there is increasing concern over things like insurability of even certain entire geographical areas, as well as that sort of transitional piece. So we're in a very real area of uncertainty, which creates challenge, but it also really creates opportunity. And so we need to try and keep the lens as positive as we possibly can in the eye of this crisis.
Johnny Thomson 07:08
Yeah, it's a difficult one. It's one of those ones, isn't it? When you think about the big picture, it almost becomes overwhelming. And, I guess, the way to tackle that is to go back to the question in terms of what is it that we can do, either as corporate entities or even as individuals? And I guess that's where this whole thing around tackling net zero comes into it, doesn't it?
Kerris Earle 07:36
Yeah. So we know that one of the biggest ways and the most effective way that we are going to fight climate change is through the net zero transition. That is the goal of climate stability. That is what we're all sort of reaching for slowly but surely. And we need to be measuring our progress towards that goal. But net zero in itself is a challenge around the knowledge and the understanding of what net zero actually is, and how it can be achieved. It's one of those terms, isn't it? We hear it all the time. Do most people actually know what it is that we're referring to? Not really because we don't really get told.
Johnny Thomson 08:19
Yeah, yeah. So give me a simple summary, then. Let's tackle that straight away and give me a simple summary about what is net zero?
Kerris Earle 08:28
Okay, so in very, very simple terms. It refers to a balance between the amount of greenhouse gases that we produce, and put out into the atmosphere, and the amount that we actually remove out of the atmosphere. So to hit net zero, we take out the amount that we add in. So that's a very simple, very simple way of explaining it.
Johnny Thomson 08:53
It's very simple. And I think we've got to make the point that then actually achieving that involves a lot of expertise and knowledge doesn't it. What I see, particularly amongst some organisations, is that they focus very much on simple tactical elements and don't think about the bigger picture and in terms of how to achieve that improvement and move towards net zero. So it's tapping into that expertise and that knowledge, that's really required, isn't it?
Kerris Earle 09:22
It definitely is. Because it's incredibly complex, it is, we try and simplify it. Because as always, it's better to tackle things in those smallest steps. We know what we're sort of going for. And as you've touched on, it's such a big issue that you can very much get overwhelmed by what it is we're supposed to be doing and achieving. And the best thing that I can say is that it is individual. Achieving net zero is complex, but it's individual and unique to each and every business. But as you've touched on, it does require that expertise and that's in subject matter, the actual business itself, the whole value and distribution change has to get pulled in. You also have to have an understanding of the data, the regulation. Understand things like scope, one, two, and three greenhouse gases. So you've got to break it down even further. And of course, that then pulls in questions about budget and resource. That's another transitional element, the cost of actually moving towards this more sustainable future. I mean, it is a long term goal. But we do have to look at the sort of short and mid term and that does mean cost, it does mean budget, getting that expertise in whether you're employing internally, or you're outsourcing. Some businesses will have to change their entire business model to sit within this new future, then you've got to talk about the meaningful data. So it's not just the information that you've got, you have to make sure it actually makes sense. And it's relevant. We're surrounded by data all the time, but we have to have the right data to make this meaningful action. And that is very, very true for our net zero targets and working towards those wider goals as well.
Johnny Thomson 11:11
Yeah, I mean, when you're talking about meaningful data, and budget, and resource, and expertise, and knowledge, and so on. It sounds like a strategy, sounds like a plan. They're things that many of us in business will be familiar with and, I guess, it's just a case of applying that thought process to this issue when looking at this in a strategic way, yeah?
Kerris Earle 11:35
It definitely is and one of the worst things we can do is have siloed thinking that this transition to a sustainable future, this incorporation of ESG, as businesses, we're looking at it separately. It should very much form part of our wider strategy. It should slot in, it should become part of it. So it is strategy that is a massive part of ESG. And not many people may be aware of that when they think about just ESG means investment piece.
Johnny Thomson 12:05
One of the things I know you talked about as well is inconsistency around definitions and standards, relating to net zero and environmental risks. Talk to me a little bit more about that.
Kerris Earle 12:20
Yeah, so it's just because obviously, it's a global initiative, particularly when we're talking about ESG. And there is a lot of chatter, there are a lot of frameworks, there are even a lot of different strategies that a business can utilise. And whilst that's good, it means that more people are paying attention more people want to do things, it does also mean that we have to really work through the chaff to get to the wheat. And it does mean as well, that there is a lot of different definitions, there's a lack of that consistency. Which means that we could be looking at one framework that we think may be suitable for us. Whereas in reality, there may be one that being developed somewhere else, at this moment in time. One of the things as well, which is a challenge that permeates the whole of ESG for the E S and the G is the fact that there is that inconsistency. But one of the good things is as more and more regulation is developing, and very much our spotlight is on the EU for this, they're very much leading the way, that consistency is gonna get pulled in.
Johnny Thomson 13:30
It's a big challenge for small-medium businesses as well, isn't it because there's so much to cover here?
Kerris Earle 13:35
Definitely. So on top of all of the other challenges that SMEs sort of typically face is this transition to net zero. Thinking about the environmental impacts and sustainability is, very much, even more of a challenge for those smaller businesses. In a Lloyds Banking Group report actually called from now to net zero, they really spotlighted the additional challenges that SMEs actually face. One of the biggest ones being, that a lot of the chatter is around changing your office, making sure it's more energy efficient, those smaller changes that we can be doing as businesses that we should be doing. But when we think about small and medium enterprises, they typically do not own their premises. They may not even pay their own energy bills. So it makes things like efficiency upgrades really difficult. So it limits what they can actually do themselves in that physical sense of changing. So it's really not easy anyway, but it does add that additional level of challenge and difficulty but of course there are firms and initiatives within industries that are paving the way, to support these smaller businesses. So there really is that help there. And that needs to grow as we continue in our endeavours.
Johnny Thomson 14:58
Brilliant, that kind of covers net zero and what we should all be doing. Let's bring it back to the insurance industry and let's consider how the industry can embrace and influence this change.
Kerris Earle 15:16
So there are a number of ways that we can mitigate and manage the challenges that we've gone over briefly today. And those new opportunities that are offered there, again, always having that positive spin on it, it's not all doom and gloom. There very much is commercial opportunity out there. So for the insurance industry that embrace and influence parts, it can very much be done in the space of underwriting and product development. So we're looking at commercial opportunities, if we change the lens of underwriting and product development to that environmentally friendly or ECO or green, whatever it is, we want to call it. We can develop products that focus on things like sustainable alternatives and sustainable outcomes. So there's a big push for greener products, there are those that not only protect policyholders in the event of damage that's caused by accident or injury suffered whatever it may be, but they also protect and promote that sustainability piece. So there's things like green and motor vehicles insurance, it could be things like looking at alternative fuel premium discounts, there could be incentives there. Incentives of premium discount for hybrid vehicles. I mean, it was only a handful of years ago, it was very difficult to insure an electric car, people didn't really know what they were doing with them, didn't know what the risk was, didn't know what the premium should look like, but now there's much more choice out there. So it's really embracing that. Same for our property insurance, just as another example. So looking at renewable materials, looking at the energy piece when we are building or rebuilding a property following a claim, or looking at alternative business practices that are again, more sustainable. So there are a number of things that we can be doing in that space that really do give us that commercial opportunity. And we can really embrace them. And another, again for insurances that claim piece: more sustainable practices, circular economy and building back better. These are phrases that we keep hearing from our reinsurers, and insurers, and we will continue to hear about them and that promotion of repair over replace. For example, LV have a green parts recycling programme for their car insurance product. It's a really simple way of embracing that circular economy. So many things happening in that element.
Johnny Thomson 17:52
Yeah, yeah. There is a thirst for this, because we've seen this as well at RiskSTOP Group because there's interest in our more remote techniques around risk assessment and evaluation. Which doesn't just bring efficiency, but of course, it helps in terms of reducing those carbon impacts, because we're not needing to send so many people out to travel to visit and to inspect premises, on site. So yeah, I agree. I think there's a whole raft of opportunities and ways in which the whole industry can position itself around this.
Kerris Earle 18:33
Yeah, definitely. There's a lot of innovation happening. Again, it's across all different industries. But when we see the insurance piece, they're very much, as I like to call them, the first influencers. So it's where they can really make an impact and difference and really lead the way in putting these systems in place, these new approaches that aren't necessarily even that new, it's just bringing it in to things that we've been doing a certain way for a number of years.
Johnny Thomson 19:04
Yeah. So are you thinking in terms of almost an education piece the industry could play a role around that, and but also incentivising as well?
Kerris Earle 19:13
Yeah, 100%. And that's for wider industries. It's for again, if we're thinking about that SME piece, our reinsurers, and insurers can really lead the way for smaller firms, including our brokers. So really embracing that leadership role that insurance always has. It's just again, looking at it through a different lens. It's just a new challenge, that is being sort of embraced.
Johnny Thomson 19:13
Yes.
Kerris Earle 19:13
But yeah, that education piece, so that's also for our clients and our customers. So as we touched on, there's an encouragement piece, there's an incentivisation piece, looking at those sustainable practices. So we can actually be encouraging our clients, our customers, to demonstrate more sustainable behaviours. I've touched on that incentivisation of premiums, that sort of push for those changes to behaviours, how we use things, what what we do and approach to the use of again, for example, our vehicles. So a real educational piece, to again, lead the way.
Johnny Thomson 20:21
Now, let's talk a little bit about reputational risk and brand risk as well, because this is heavily related. I think we all know, and understand this. That there's a serious danger here, isn't there? Of presenting a position of being sustainable and environmentally conscious, but not really being so.
Kerris Earle 20:44
Yeah, yeah, it's a major challenge, the brand and reputation piece. There, again, the insurance industry, in particular general insurance is exposed to both the reputational risks and the opportunities and how they actually respond and contribute to the climate crisis. So what they're actually doing to make a difference what they may not be doing, to make a difference. So actually being more sustainable does work in a business's favour it is increasing, that reputational piece, it is making people more aware of brands. Companies, regardless of industry, are under pressure. Especially from new generations, so we've got millennials and Gen Z are really pushing the way in the sustainability piece. Considering their own environmental impacts as customers, as consumers. And that also then has another impact on opportunities for recruitment. Individuals are wanting to work with a business that's aligned with their own values. So it's not even just about customers anymore. It's also about pulling in talent. That recruitment piece, actually keeping people that sit within our values and ESG plays a massive role within this element also. But yeah, there is massive risk here. I mean, we're seeing now, it was predicted there would be, and we're seeing those sort of first waves of litigation, where it comes to greenwashing claims and things of that nature.
Johnny Thomson 22:16
Yeah, 'cos I was gonna say there are sanctions aren't there, around this. This is not just a case of damaging your reputation, but you can suffer real sanctions as a consequence.
Kerris Earle 22:24
Yes, yeah, definitely. There is real consequences, there's a knock on effect. And a lot of the regulation that's coming through now is actually really aiming to hit a company where it hurts most. And that is typically in the pockets. So, it is very much, even more in development. Moving away from that comply and explain, to that comply or pay attitude.
Johnny Thomson 22:51
So yeah, think of it in a positive sense.
Kerris Earle 22:53
Yeah, definitely. So, a lot of the time when we're talking about these challenges, it does seem, there's a real, there can be a real negative spin on it. But there is real positivity around this also, we can be making a massive change. One of the best things, that we can think about as well, is we will make mistakes. Businesses will make mistakes. But the point is, we're looking for progress, we're not looking for perfection. Nobody is going to absolutely nail this, no matter what their LinkedIn profile says, no matter what their marketing says. It's just working towards making that positive difference. And then what that will actually do, as well as getting that brand and reputational piece, it will also attract that investment or it could even be acquisition. But also we need investment around the whole of the green transition, anyway. It's a really key element here and it is why ESG has grown so exponentially, in the last sort of five years or so. So that investment piece in green initiatives, that investment piece in businesses that are really embracing the sustainable transition. And that increasing focus on things like climate change, net zero, is really demanding that firms are aligning their operations and their products with their sustainability goals, to present that opportunity for that investment piece. So actually attracting more of that investment or again, possibly acquisition if that is what the business is looking for.
Johnny Thomson 24:27
Yeah, I think that's a really important point where you make about making mistakes. You mentioned earlier that there's no precedent for this. This is all new territory. And so the only way to learn is to experiment, try things, see what's happening, understand the impact, and then move on.
Kerris Earle 24:44
Yeah. And of course as the litigation piece develops and one positive again, that can come from that, is we actually get case law, businesses know what's actually happening, what's expected of them, what could happen, when it does wrong. So that all leads the way too and it is going to be trial and error. We've never faced anything like this before. It is new territory. Even though we've known about this since the 80s, we're only really starting to pay attention. Because as people, we don't really believe anything until we see it and we're now actually seeing it. So yeah, very much, that consciousness point, pulling it in for everybody. It really does pull in the fact that yes, it is scary. Yes, it is a challenge. But we can embrace it, there are positives around the negatives and we could really be making a difference for future generations to come. And personally, I think that's a brilliant sort of legacy to leave behind as businesses.
Johnny Thomson 25:48
Absolutely. I think, there's a phrase that's often used now around this issue, and it's which side of history do you want to be on? And I think that's a really, really important point, something we should ponder and look ahead on and realise that this is something that's major, that we can all contribute towards, in a positive sense.
Kerris Earle 26:08
Yes, yeah, definitely. It's exactly that. It is a hot topic. It is highly political, as you've touched on, but we should still be striving to make a difference. And I do believe it is really one of the places where actually, business can probably have a bit more of a positive impact than say, for example, what's happening in the political sphere at the moment. So it's not waiting, necessarily for the governmental element to really catch up. It's actually sort of pushing forward seeing what can we do now? What's the difference that we can make? And again, pave that way and influence that change.
Johnny Thomson 26:44
Brilliant? Well, many thanks, Kerris. A lot covered there. Hopefully helpful to everyone out there listening in, and a lot for us all to think about. Next time, we're moving on to social risk factors. And we'll be looking at things like corporate culture, around social responsibility, the protection gap, which is one of the things that you mentioned a little earlier as well, and we'll be expanding on that. So yeah, I'm very much looking forward to that one.
Kerris Earle 27:17
Me too. And hopefully, we can answer some of those questions that I've probably generated from everything that I've said today.
Johnny Thomson 27:26
Well, it's impossible to cover, isn't it. We're making four, all together, four podcasts around this subject. Even that probably won't be enough.
Kerris Earle 27:38
No. But it still gets the information out there and an overview is something that people then can deep dive into themselves, or find that sort of training element to help them.
Johnny Thomson 27:49
We can only try our best, Kerris.
Kerris Earle 27:51
Exactly.
Johnny Thomson 27:54
So yeah, we look forward to moving on from the E to the S.
Kerris Earle 27:58
Yes, very much so.
Johnny Thomson 28:01
Well, thanks again Kerris, and see you next time.
Kerris Earle 28:05
Thanks, Johnny. See you next time. Take care.
Johnny Thomson 28:09
That's all for this episode of the RiskACUMEN podcast. If you have any questions or comments around the topic we've discussed today, or any of our other risk related content, please head to our LinkedIn page. You can find a link at riskacumen.co.uk. Thanks again for listening in and until the next time, goodbye for now.
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