Current Issue

Climate change has already begun to reshape the planet and the ways we live and conduct business. Unfortunately, many scientists project the negative effects will only get worse. The 1,300-member Intergovernmental Panel on Climate Change forecasts a temperature rise of 2.5 to 10 degrees Fahrenheit over the next century.

According to the National Oceanic and Atmospheric Administration, 2020 was the second-warmest year on record, falling below 2016 and just above 2019. As the climate continues to change, the resulting spate of heat waves, wildfires and severe storms is likely to compromise nearly every region’s infrastructure, agriculture and ecosystems. In fact, a study by the National Centers for Environmental Information found that the top five storm-related disasters in 2018 and 2019 alone combined to cause more than $75 billion in U.S. damages.

The Continued Rise of Climate Change Initiatives

If damage to the climate is not reversed by 2030, it may be too late, according to the United Nations. Further, “the 2020s could be the decade that makes the difference, but only if the right action is taken to cut carbon emissions,” the World Economic Forum stated.

At the federal level in the United States, President Biden has committed to rejoining the Paris Agreement and, when beginning his term in January, called for a “whole-of-government approach to put climate change at the center of our domestic, national security, and foreign policy.” This has already included enacting numerous executive orders and initiatives directing federal agencies to procure zero-emissions vehicles, ensure “federal funding is not directly subsidizing fossil fuels,” and “eliminate fossil fuel subsidies from the federal budget from fiscal year 2022 onward.” Other directives called for forming a working group to accelerate the development of “technologies that can capture, remove and store carbon dioxide as well as heating and cooling products that don’t rely on highly potent greenhouse gases.”

As corporations gain a deeper understanding of the economic and societal impact of climate change, many are placing greater emphasis on environmentally friendly products and technologies and adopting green philosophies toward their operations. Many have started taking aggressive measures to not only safeguard the environment and reduce their carbon footprint, but also to position their companies as eco-friendly leaders in the fight against global climate change.

For instance, in January, GM announced its new goal to “end production of all diesel- and gasoline-powered cars, trucks and SUVs by 2035 and shift its entire new fleet to electric vehicles as part of a broader plan to become carbon neutral by 2040.” The automaker also expressed an intent to use 100% renewable energy to power its U.S. facilities by 2030 and global facilities by 2035—five years ahead of its previously announced goal.

Amazon finished 2020 by making the single largest corporate investment in renewable energy in one year. This included investing in 35 utility-scale wind and solar energy projects to supply renewable energy for its corporate offices, fulfillment and data centers, making Amazon the largest-ever corporate purchaser of renewable energy. The company’s stated goal is to reach net-zero carbon emissions across its business by 2040 and power its infrastructure with 100% renewable energy by 2025, five years ahead of its initial 2030 target.

Other major companies working on green objectives include Disney, which initiated polices to reduce electrical consumption and produce zero net greenhouse gas emissions in its facilities. Hewlett Packard also enacted an aggressive recycling program that coincided with cutting back toxic substances in its products.

Insurance Marketplace Response

Many insurers based in Europe have begun to adopt climate risk minimization strategies, including exiting fossil fuel-based industries as early as 2020. Insurers in the United States are not far behind and many may start their exodus within the next few years.  

Numerous forces are at play. Some insurers are turning their focus toward green initiatives and smart technologies in an effort to “do the right thing” in an environment that is increasingly threatened by the effects of global climate change. In addition, many carriers are feeling the pressure from environmental advocacy groups and investors to invest in eco-friendly industries and practices. As a result, several industries, including the fossil fuel sector, are under far greater scrutiny and may have a harder time insuring their assets at the levels that were available just a few years ago.

For example, environmental liability insurance has started to dry up for active coal-mining exposures in the United States, where a significant number of insurers are no longer underwriting coal mining risks or have indicated their intent to leave this class of business by 2024. Other carriers have even begun reviewing exposure concentrations in the western third of the United States, which is prone to frequent wildfires. This is driven in large part by the recent fires in California, Oregon and Washington, which produced unprecedented damage and life-threatening conditions.

In some instances, climate change exclusions for certain products or classes of business are expanding to encompass the losses arising from the emission of carbon dioxide, methane or any other gas, no matter the cause of injury. This includes the expenses, claims, suits and liability arising from climate change triggers such as increasing or decreasing temperatures, rising sea levels, changing weather or water patterns and the frequency or intensity of storms.

Several environmental insurance carriers have begun using analytics to better identify potential environmental impacts to certain classes of real estate exposure along the southeastern coast and Gulf Coast. The use of such analytics will likely expand beyond the largest insurers as climate change continues.

As a result, risk professionals looking to insure their businesses, products and services should be aware of the specific underwriting risks that could affect the pricing, exclusions, terms and conditions associated with their policies. This could include increasing deductibles or premiums for specific environmental liabilities or pollution exposures, operations performed within a given distance of a shoreline, and areas frequented by tornadoes, hurricanes or other severe storms. 

Subsequently, it may be beneficial for risk professionals to not only carefully assess the potential environmental liabilities their organizations face, but also reach out to their broker to better understand the conditions and trends that are likely to be more intensely scrutinized in the near future. The companies that approach the marketplace with a forward-looking world view of their carbon footprints and their roles in this growing eco-friendly economy may be best prepared to adapt.

John J. Heft is a senior vice president in RT Specialty’s environmental and construction professional practice.