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How the Insurance Industry Can Approach Mitigating Climate Change Risks

Updated: Mar 30, 2023

Conversations about climate change are centered around what tools organizations and individuals have at their disposal to accelerate the transition to green energy. One key question the insurance industry contends with is how to address adaptation and mitigation challenges of climate change.

The risks of clean energy installation are real, and insurers are particularly exposed. Transitioning to a resilient carbon-neutral economy requires stepping up global financing of climate mitigation and adaptation measures with a more integrated approach. Insurers, as risk managers and investors, play a critical role.

Insurance providers should be actively providing solutions through risk management strategies and investment into projects in areas that need additional assistance. They are positioned to take on risks that are unique to project developers actively working on mitigating carbon emissions and working to create sustainable energy solutions.

  1. Insurers can take on weather and infrastructure risks exposed to changing climate and are therefore positioned as leading authorities on the costs of business-as-usual approaches.

  2. Insurers can take on risks of holding back deployment of renewable and distributed technologies to mitigate carbon emissions and contribute to resilient energy grids. The physical risks of climate change are rising in severity, with widespread effects on people, communities, businesses, and governments globally. Investing in clean energy to mitigate changes in the global climate is necessary. Clean energy’s creditworthiness often struggles to recover from energy shocks in the market. Government funding does not provide all the resources necessary for a developer to rise to meet market demand. Entities conducting risk analyses must actively contribute to the solution.

  3. Insurers can deploy their investment arms to be an essential source of capital for sustainable infrastructure projects. Significant capital is needed for the large-scale deployment of new technological solutions to enable and expedite the decarbonization of key sectors. Capital from tax equity entities, private investors, private and public grants, and financiers are necessary to fuel the next steps in advancing clean energy. Yet new technologies and infrastructure systems come with myriad risks that must be assessed and managed with a full life cycle view to attract large-scale capital.

Insurers are uniquely positioned to allocate risk capital to proactively combat climate change, as opposed to simply absorbing the risks of the market. Government entities, such as the New York State Energy Research and Development Authority alongside the Department of Energy, are leading the way with resources and funding available for developers and financiers to procure cheaper capital and other resources to supply clean energy to entities that need to comply with public policy.

Local policies are rising to meet this challenge by assisting all stakeholders in adopting clean energy solutions; 70% of buildings in 2050 have already been built. Environmental retrofits are necessary to further the carbon-neutral economy. Local laws are increasing demand for building retrofits, and financial tools must evolve to provide solutions that work for everyone, including New York City’s Local Law 97.

But despite targeted government action, financing gaps remain. Financial and credit risks are holding back the clean energy market. Due to the scale of the challenge, blended finance can augment the impact of government subsidies. A combination of policy commitment and private investment is needed to facilitate climate migration, and here is where insurers can easily participate.

All project stakeholders are exposed to risks Insurance provides risk mitigation that can appropriately allocate capital to certain risks and advance all stakeholder goals. Insurers are the long-term investors that clean energy developers and financiers need to meet the long-term policy goals established by international and domestic governing bodies. Private capital is available for regulated, core technologies that can meet goals aimed at addressing climate change. Insurance provides supplemental financial tools to mitigate risks, allow private and public funds to actively respond to community needs, and build a sustainable economy that meets stakeholder needs.


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