Energy Transition Investments: How Advanced Analytics Can Empower Organizations

Energy Transition Investments: How Advanced Analytics Can Empower Organizations
May 2, 2024 8 mins

Energy Transition Investments: How Advanced Analytics Can Empower Organizations

Energy Transition Investments: How Advanced Analytics Empower Organizations

Advanced analytics can empower organizations with deeper insights into the risks and opportunities surrounding renewables, while also supporting energy transition investment.

Key Takeaways
  1. Strategic alignment with evolving ESG standards is imperative for companies seeking to access insurance capacity, underscoring the need for sustainability across all operations.
  2. The ISSB plays a pivotal role in shaping global sustainability reporting standards, influencing both investment decisions and capital allocation.
  3. Understanding the capital market spectrum clarifies expectations and requirements at various stages of project development, helping to navigate the energy transition.

The natural resources sector faces unprecedented challenges and opportunities driven by the push to transition toward more sustainable practices. As organizations strive to navigate this complex terrain, the ability to access insurance capacity becomes increasingly connected with their environmental, social and governance (ESG) commitments. Recognizing the pivotal role of ESG and how it will shape the dynamics of the natural resources reinsurance market is therefore top of mind. 

“Fossil fuels are required for an efficient transition, so building a strong narrative to continue gaining capital market support is imperative,” says Daniel Ocampo, Aon’s Global Senior Risk Consultant for Natural Resources. “Using data as the backbone of this analysis is one approach to help build a credible story.”

ESG is Reshaping the Natural Resources Reinsurance Market

The natural resources reinsurance market has recently witnessed a significant shift as insurers and businesses grapple with evolving ESG commitments. Insurers are increasingly scrutinizing the ESG performance of companies and restricting or withholding risk capital from those unable to demonstrate a clear transition plan aligned with sustainability goals. 

Accessing insurance capacity now requires companies to articulate and evidence their ESG commitments across multiple factors, says Robert Colver, Aon’s Global Industry Lead for Natural Resources. “This strategic alignment with sustainability standards has become a prerequisite for securing insurance coverage in the energy sector.”

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To maintain access to durable capital, companies must evidence and articulate their ESG commitments to their key financial investors and other stakeholders.

Robert Colver
Global Industry Lead, Natural Resources

A Global Standard for Sustainability Reporting is Here

The emergence of the International Sustainability Standards Board (ISSB) marks a pivotal moment in the journey toward global sustainability reporting standards. Through a consistent framework for disclosing sustainability-related risks and opportunities, ISSB standards facilitate informed investment decisions and capital allocation. 

As countries adopt ISSB, they contribute to the harmonization of sustainability reporting practices, enhancing transparency and comparability across industries and jurisdictions. In particular, Brazil’s pioneering adoption of ISSB as a mandatory disclosure framework sets a precedent for other nations, signaling a concerted effort to attract international capital and drive sustainable development.

Case Study: Brazil is the First Country to Adopt ISSB
  • What’s the Story?

    Brazil is the first country in the world to adopt ISSB as its mandatory disclosure framework starting in 2026. The ISSB is meant to aid the efficient allocation of capital across global markets.

  • Why it Matters

    By becoming an early adopter, Brazil hopes to ease the capital flow from international investors into the country, attracting more players to the local industry and improving financial sustainability of Brazilian entities. The country can also facilitate the development of infrastructure and the natural resources sector, including low carbon technology and renewable energy.

    “This strategy could facilitate the much-needed connection between the public and private sector and unlock an efficient mix of energy sources by diversifying fossil fuels, conventional power generation and renewable energy,” says Daniel Ocampo, Aon’s Global Senior Risk Consultant for Natural Resources. “It will be interesting to see how the adoption of ISSB plays a role in fund allocation from 2026 to 2030.”

  • Outcomes

    As of March 5, 2024, Singapore became the second nation to include ISSB as its mandatory disclosure framework. As more countries potentially adopt the mandatory global standard into their regulations and public agendas, capital flow will improve. 

    “It looks like risk capital can indeed be addressed the same way at the beginning of the capital market spectrum, as it is at the end or vice versa,” Ocampo concludes.

Accelerating Energy Transition with the Capital Market Spectrum

Understanding the capital market spectrum is essential for navigating the complexities of the energy transition. This spectrum sets the expectations and requirements of capital markets at different stages of project development, from initial funding to securing reinsurance capacity. 

A holistic transition strategy, supported by credible data and aligned with sustainability goals, is crucial for success. By effectively communicating transition plans, companies can access the capital necessary to accelerate the energy transition while mitigating risks associated with evolving market dynamics.

Capital Flow Across Financial and Reinsurance Markets
Capital Flow Across Financial and Reinsurance Markets

47%

of business leaders from China, France, Germany, India, the UK and the U.S. would invest more than 10 percent of their operating profit in increasing the sustainability of their business in 2024/25.

Source: Reuters

“We advocate for a relative approach to data presentation, enabling meaningful comparisons of performance across industries, geographies and entities,” adds Ocampo. “By focusing on the relativeness of data disclosures, organizations can provide transparent insights into their transition journeys.”

For example, presenting emissions reductions relative to production levels offers a more holistic and tangible assessment of progress. This approach enhances transparency and fosters informed decision-making among stakeholders, helping to drive sustainable outcomes across the energy sector.

Achieving Energy Security Remains a Key Goal

With the growing push toward renewable energy adoption, energy security  should also remain a priority, particularly in developing economies. Balancing the Energy Trilemma — comprising energy security, sustainable energy and energy affordability — is essential for driving inclusive and sustainable growth. 

The Energy Trilemma Framework
The Energy Trilemma Framework

"For an effective energy transition to take place, the Energy Trilemma needs to be solved and evaluated across regions," says Colver. "Different geographies will present a different set of challenges and opportunities, while trying to balance these three factors.

Capital markets play a crucial role in supporting developing economies' energy transition efforts by providing the necessary funding and risk management solutions. Governments and regulators are working collaboratively to address energy security challenges while advancing the global energy transition agenda. While the need to decarbonize and develop greener technologies is on top of priority lists today, fossil fuels are required for an effective transition.

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Without the capital markets funds today, from a financial or reinsurance perspective, entities will not be able to achieve their long-term transition plans. That is why collaboration, consistency and finding a global way forward is key.

Daniel Ocampo
Senior Risk Consultant, Natural Resources, Global Risk Consulting

Protecting Long-Term Enterprise Value

As companies navigate the evolving landscape of ESG commitments and energy transition dynamics, protecting long-term enterprise value becomes paramount.

How to Protect Long-Term Value in Two Steps
  • 1. Build on consistency
    • Aon’s Proprietary Transition Performance Index (TPI) helps organizations evidence the trajectory of their climate transition plans to underwriters using datapoints (e.g., measurement of carbon emissions).
    • The TPI can help those markets continue to support hard-to-abate sectors while helping clients reduce total cost of risk and access the capital needed to accelerate their transition.
  • 2. Focus on transparency
    • The increase in greenwashing issues means organizations need more help forecasting their transition strategies and objectives (i.e., Scope 1 emission reduction targets by 2030).
    • The greenwashing module within TPI shows greenwashing resiliency by providing evidence on accuracy and yearly progression toward targeted goals.

As Emmanuel Faber, chair of the International Sustainability Standards Board, aptly stated in his closing remarks for the 2024 ISSB Sustainability Symposium: “Entities need to focus not only on the what, but also on the when and how, for an efficient transition to take place.”

Strategic alignment with sustainability standards, transparent communication of transition plans and collaboration with capital markets will become even more essential for ensuring resilience and sustainability.

Aon’s Thought Leaders
  • Robert Colver
    Global Industry Lead, Natural Resources
  • Daniel Ocampo
    Senior Risk Consultant, Natural Resources, Global Risk Consulting

 

1 https://www.iea.org/about/emergency-response-and-energy-security 

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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