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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership Team.

Lindsey Hall: Welcome to ESG Insider. An S&P Global podcast where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape. 

By now you've probably heard 2023 was the hottest year on record globally. And as 2024 draws to a close, it's on track to overtake last year's title. Just last week, the EU’s Copernicus Climate Change Service said 2024 will be the first calendar year above 1.5 degrees Celsius, the key global warming limit set in the Paris Agreement on climate change.

Esther Whieldon: And as we heard from scientists on this podcast, every degree of warming will lead to greater climate impacts. That means extreme weather events will happen more often and cause more damage to homes, crops, businesses and infrastructure. And this has big implications for companies. One sector that is at the forefront of climate risk is insurance, which has seen an increase in claims tied to extreme weather events.

Lindsey Hall: And the private sector is taking note of these growing climate risks. And last week's episode of this podcast, we talked about how the private sector is increasingly showing up to discussions about climate change, for example, at the recent UN Climate Conference called COP29. We also heard from one of our guests last week that insurance can be an enabler of climate action.

In today's episode, we're taking a deeper dive into how the insurance industry is approaching climate change in an interview with Liz Henderson. Liz leads climate advisory for Aon, that's a global insurance and reinsurance brokerage firm. And she was at the COP29 conference in Baku, Azerbaijan. I started the conversation by asking Liz about her takeaways from this event.

Liz Henderson: I know that there was significant challenges with this particular COP, but I still fundamentally believe that there's no better place for people who are operating and working on climate-related issues to connect with one another and hear from stakeholders across a wide variety of sectors. So I found my time there to be really informative and helpful for what we're trying to do within the insurance industry around climate-related issues.

One thing that I think is really interesting that I've seen evolve in the last few COPs is just how critical and central the topic of insurance is becoming in a lot of these transition-related questions. The ability to get access to highly secure insurance capacity is becoming a real challenge for individuals who are trying to transition, whether they're moving away from hard-to-abate sectors or they're investing in new technologies in renewable energies, insurability is a prominent factor in all climate transition plans. So it's great to be on the ground talking about insurability and insurance issues with all of those different stakeholders.

Lindsey Hall: Can you just really explain very plain English, how insurability comes up in the conversations that you were having or with some of the stakeholders that you're talking to?

Liz Henderson: Absolutely. I think one of the trends that we've seen or this COP in particular, was tagged the finance COP because the need for private capital to come in and invest and lend into businesses that are targeting mitigation and targeting adaptation measures is really critical to meet all of our ambitions to move away from fossil fuels. But I think what people often forget is that insurance and the availability of insurance that goes alongside private finance is just as critical.

You cannot have bankable high-value investment capital without risk capital alongside it to derisk those investments. And one of the things that we talked about at any conversation that I was in is just how important insurance really is across all aspects of the economy. Well, insurance is an enabler for investment dollars to come in if you're in construction, if you're in new technology, if you're in food and ag or pharma, you need that insurance there as a backstop to flow the investment dollars.

So it comes up in every conversation. And I think what we've really started to see is a focus and an understanding that the insurance sector has insights, data and understanding of risk that is differentiating than what other sectors of the economy have. And we need to lean into the conversations early stage in order to make sure we're getting the best out of our investments. We're getting more resilient programs. We're getting more resilient communities. We're getting more resilient technologies because of the insurance value proposition.

Lindsey Hall: Okay. And based on those conversations you're describing in Baku, were there any key outcomes from COP29 that you'd like to highlight that you think were particularly relevant for the insurance industry?

Liz Henderson: Absolutely. First and foremost, I think what continues to be relevant for the insurance industry is just an understanding of the speed and scale at which we need to help investment dollars flow into the developing world for adaptation measures. And even though at the end of COP29, the final agreement was far below the expectations and the needs for the developing world to adapt to the changing climate, we know that the private sector has a strong role to play to drive investment dollars into that region.

So what I mean by that is adaptation financing is money that goes to any sort of pre-disaster investment to make communities more resilient and sustainable against climate change, protection against flooding, protection against sea level rise, wildfires, droughts. These events are happening all over the world now at a greater rate than they have in the past. And the developing world needs the support of the developed world to invest in their infrastructure in order to withstand those events.

Insurance has such a strong role to play in the resilience question. The role of insurance already has made our world a safer place. In the developed world, our homes are safer, our cars are safer because insurance incentivizes people to make investments in resiliency. And we have to do the same thing in the developing part of the world through different mechanisms.

For example, Aon has really partnered with the International Federation of the Red Cross to expand their disaster response emergency fund in order for them to have the ability to do pre-disaster financing to create incentives for people to make their communities more resilient without putting at risk their ability to pay out dollars when events happen to help communities respond and recover more quickly. This is the first of its kind of deal that we placed to this year that has already been creating payouts for individuals around the world.

So we've paid out about $7 million worth of disaster response, supporting, I believe, more than one and a half million people who are impacted by floods and other natural catastrophes this year. And it is absolutely something we can scale to other programs to expand the fundraising ability of these types of humanitarian organizations. There were too many conversations I was in where people were surprised to hear about insurance products that could actually help them answer a challenge.

Whether it was insurance that we're putting together for small owner farms in the developing South or insurance products for derisking transition plans and technology performance guarantees, people were surprised still at how much the industry has to offer these challenges. And I think that to me, it's invigorating because we have so much more to do, but it's a problem we can solve, and we have the ability to solve.

Lindsey Hall: Of course, COP29 took place shortly after U.S. elections and was the backdrop for many of the discussions that I was having in Baku. I wanted to ask your take. Does the current political landscape impact the work that Aon is doing?

Liz Henderson: Yes. I know that the election certainly creates a backdrop that is different than what it was prior to the election results coming out. But I think Aon will always be in the business of helping our clients understand the risk and match that risk to capital that can help them to make really good decisions around whatever business plans they're trying to move forward. That fundamental challenge is still there, and we are still here for our clients to help them understand how climate change is impacting their business.

For the insurance industry as a whole, we have an invested interest in both resilience and adaptation as well as mitigation. We have paid out since the year 2000, more than $2 trillion in claims for natural catastrophes around the world. It is really important for our industry to make sure that communities are investing in resilience, that they're adapting to the changing climate and also that we're investing in the mitigation that's necessary to prevent the climate impact from getting worse over time. So our industry has a tremendous amount of influence and incentive to make sure we're still making progress across both of those goals.

Lindsey Hall: More than $2 trillion, that is such a striking number.

Liz Henderson: Yes. It's good to remember because our industry has been there to pay claims after events. I think we are a force for good in the world, and that's just a testament to how we're making an impact.

Lindsey Hall: What about in the markets where because of the rising risks from climate change, we're seeing insurance companies pull out of markets?

Liz Henderson: Yes. I think it's a real bellwether for what we need to do within the insurance industry, but also a multiparty kind of stakeholder group thinking about where in our country of the U.S., but also where else in the world are we seeing events happen at a greater frequency with more losses happening where it eventually becomes uninsurable. The insurance product will only take us so far, and then there will be a remaining amount of risk that will have to be handled, whether it's through managed retreat from high-risk areas or other public government programs to help those communities invest in resilience. I think that is a question that still needs to be answered.

I also want to point out that even though there are challenges in Florida and California right now, the industry is healthy. It's paying claims, and it is really critical that companies are able to stay in business and pay those claims. So when it becomes so risky in a particular area, the insurance industry isn't able to get the return they need on their premium, it puts the industry at risk for not being there when an event occurs, and that's a worse outcome. So claims are still being paid, coverage is still available. That's the important thing to remember.

Lindsey Hall: You touched earlier on the importance of data and the data that the insurance industry has and the understanding of risk. Can you talk a little bit more about that?

Liz Henderson: I think that's a great question and something that I really believe the industry has a unique perspective on. We have a perspective on risk. And that's a different perspective than other people might have when they're thinking about climate-related data set. We look at everything through that risk-based lens, which means we can help companies understand the risk that they're taking on, translate that risk into real financial impact to their organization and then create programs to manage that risk.

And so, when I think about the data that the industry has, we've been modeling and trying to understand climate change risk for decades. We have been covering hurricanes, floods, wildfire risks for a long time. And with that experience comes a deep understanding of the different model methodologies that are out there, the different data sets that can be relied upon and to create a strong framework to understand risk, not just hazard, but actually the full view of risk, which takes into account your exposures and your vulnerabilities to those hazards.

So we work with our clients to take the data that's available from a pure data feed to actual actionable insight that they can make decisions on that have real impact on their balance sheet. The other thing that we have great insight on is the impact of resiliency investments. So the industry is well set up to be able to take into account if you are building a home to a certain standard that withstands hurricane force winds or you are putting in flood defenses in a community, our industry has the tools to take that into account in assessing the risk and coming up with premiums and capacity for those regions.

So resilient communities and resilient investments are something that our industry can really help to quantify the cost benefit of. And I think one thing I heard at COP quite a bit is that data flow is really needed and is something that isn't happening as quickly as it could be.

Lindsey Hall: You've talked to me about the outcomes and the key takeaways that you had from Baku. Often, these COPs set the scene for sustainability discussions in the year ahead. What can you tell me about what's on the horizon for Aon as 2024 comes to a close and we look ahead to next year?

Liz Henderson: For me, 2025 is going to be a year where we are driving the insurance value proposition to the C-suite and to the boards of our clients. I think that insurance has significant value to overall business strategy. But too often, it's not the person who's purchasing insurance or who is putting together your insurance program was not sitting in the same room as your sustainability leader or the person who's responsible for your transition plan. I want to see those conversations happening in the same room more consistently, and we can really drive that forward.

As organizations put their transition plans together, which we want them to do because we know that will help drive actionable change, we have to make it easy for them to do, and we have to derisk that transition plan. We can do that when we're all in the room together, having that conversation with the risk managers, with the sustainability teams together. I think the other thing in 2025 that we'll see is a lot more focus on emerging risks in the developing world where insurance hasn't had enough penetration in the past that there is a viable product, and we need to prove that out.

Examples are products for sustainable farming practices in Colombia, where we're running a pilot right now with a food company that is trying to bring insurance coverage to their small owner farmers in order to create resiliency in their supply chain. We're talking about more products around carbon offsets and nature-based solutions where we know that protecting nature is a critical part in our journey to net zero. Insurance products exist for those sort of niche risks, and we think 2025 is a year where we're going to see a lot more action around those.

Lindsey Hall: Great. Thank you. Well, Liz, thank you so much for sitting down with me and sharing your perspective with me and our listeners.

Liz Henderson: Thank you for having me. It's a great conversation.

Lindsey Hall: So we heard from Liz today that the insurance sector is becoming increasingly central to climate and energy transition discussions. She said access to insurance is crucial for individuals and businesses moving away from hard-to-abate sectors or investing in renewable technologies. And she said, you can't have bankable high-value investment capital without risk capital alongside it to derisk these investments.

Esther Whieldon: Liz also touched on another topic we hear about a lot in this podcast, and that's data. She said the insurance industry has unique perspective on risk, thanks to its long history of modeling and trying to understand the risks presented by things like hurricanes, floods and wildfires. And she said, this allows insurers to help companies measure and manage their climate risks.

Lindsey Hall: We'll continue to track how different industries like insurance are responding to climate change, and we'll be back later this week with more special coverage of COP29, including an interview with Sean Kidney, the CEO of the Climate Bonds Initiative. So please stay tuned.

Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us a review wherever you get your podcast. 

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

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