Decarbonizing Your Business: Finding the Right Insurance and Strategy

Overview

Businesses and governments around the world are making strides toward meeting the latest climate goals, but the race to reduce greenhouse gas emissions is not without its challenges. Global energy consumption continues to grow, and the demand for energy sources like oil and coal is also on the rise. As decarbonization — a process that involves reducing and/or eliminating the emission of carbon dioxide (CO2) and other greenhouse gases — becomes increasingly urgent, businesses are exploring investment opportunities in green energy, carbon capture and storage and other sustainable solutions.

Climate readiness varies widely across industries, according to Euan Nicolson, Energy Transition Lead for Natural Resources at Aon. “We have traditional oil and gas and petrochemical industries, the majority of which are looking for ways to reduce or eliminate the carbon emissions from their operations, while at the same time, delivering secure, safe, cost-efficient energy,” Nicolson explains. “At the other extreme, we have the ‘clean energy’ companies whose operations are already at or close to carbon neutrality, and then you have those somewhere in between. There are many different pathways and timelines to decarbonization.”

As the U.S. Department of Energy allocates $135 million to reduce the carbon footprint of the industrial sector, to support research, development and pilot-scale demonstrations to reduce energy usage and emissions — in addition to the earlier announcement of $6 billion in grants to decarbonize heavy industry — companies at every stage of decarbonization are determining the next steps to meet their climate goals. Whether the net-zero targets of businesses will deliver the United States 2030 emission targets under the Paris climate accord all organizations that have made these commitments publicly will need to demonstrate their progress to reducing emissions. “Every sector will be facing this challenge,” says Natalia Moudrak, Managing Director, Climate Resiliency Leader at Aon’s Public Sector Partnership. “The closer we get to the dates that were set by these entities, the more pressure there is to show, ‘What have you done? How much progress have you made to reduce emissions, and how are you addressing the residual emissions you simply can’t eliminate in your operations and across the supply chains?’”

In Depth

In the U.S., industry generates 30 percent of CO2 emissions, with energy-intensive sectors such as iron and steel, food and beverage, chemical manufacturing, petroleum refining and cement manufacturing emitting the highest levels of greenhouse gas. As these businesses make progress on their decarbonization journeys, leaders are discovering new opportunities and risks in a world of environmental and economic uncertainty.

Regulating and Incentivizing Decarbonization

The U.S. Inflation Reduction Act, where the majority of the $394 billion in energy and climate funding is in the form of tax credits, and a new, $53-billion-dollar program in Germany are among several government initiatives that earmark funds to combat climate change. But not every business is equally equipped to apply these funds to their environmental strategies. Nicolson notes that many producers of “clean” energy or low-carbon products currently face unique challenges. “You tend to find that their development and operational costs are higher,” Nicolson says. “Their margins are lower, and accordingly their business model is one which has to be highly differentiated to be attractive to investors. Alternatively, the business has to have various support packages or subsidies built around them.”

Though government climate regulations encourage accountability, they can add to operational complexity in certain industries. Nicolson explains that the increasingly interconnected nature of some industries — such as carbon capture hubs and the associated transportation and storage — means additional considerations due to the involvement of a wider range of stakeholders and challenges. “There are all sorts of risks associated with these projects, including some new risks which the industry hasn't had to cater with before,” Nicolson says.

Reducing Emissions, Reducing Risk

Depending on the industry, businesses may encounter numerous risks throughout the decarbonization process. New technology, supply chain disruptions, political volatility, inflationary pressures and the need to hire the right type of talent are among the potential risk factors for companies seeking to reduce emissions.

Obtaining financial support or insurance coverage to mitigate these risks requires an elevated level of planning. Supporting decarbonization technologies in particular requires a proactive approach. “It’s extremely important to speak with potential risk transfer partners at an earlier stage than you might do for any other lines of insurance when you're talking about taking new technology to market,” Nicolson says. “By partnering with the right insurance partner, you've got a significantly higher probability of delivering a viable solution to protect your project or product, and in turn enabling investment capital that might otherwise be unavailable if a conventional approach had been adopted.”

Sometimes, despite enthusiasm about new technology advancements, it’s hard to scale financing for first-of-a-kind technology pilots. Moudrak explains that newer technologies such as offshore wind, green hydrogen, long-term battery storage and sustainable aviation fuels may struggle to accelerate given some hesitancy to deploy capital into areas with less proven history of technology performance. “It's therefore important to think of ways to combine risk, engineering and finance acumen, and work collaboratively across public and private sectors to identify optimal risk transfer and project financing solutions,” Moudrak says.

Opportunities and Insurance for the Low-Carbon Transition

Combining risk engineering assessments across a project life cycle — from project design, construction, implementation, operation, maintenance and decommissioning phases — with an understanding of insurance solutions available to support technology deployments can be powerful to unlock greater project investments, Moudrak explains. However, time is not a luxury to improve understanding of emerging technologies and new means of mobilizing capital. “By 2050, most of the technologies that we will need to get to our energy transition targets either don't exist yet or they're in the prototype stage,” Moudrak says, citing the International Emissions Trading Association. “It’s fair to assume that most companies working on this new generation of tech are IP-rich and physical asset-poor. So, understanding what their IP assets are worth and protecting the IP against various risks like patent trolls and infringements can help enable new means of growth financing, such as IP-backed lending solutions.”

Small or growing companies will need to act fast to make an impact, according to Nicolson. “There is an important role here for the insurance sector to support the clean-energy innovators, their pilot projects and early phases of development as well as the larger companies and larger projects. The successful delivery of new technology at the scale required to reach 2050 targets will require significant support from the insurance sector. This is an area of elevated risk, but also opportunity. The insurance industry has the potential to use its expertise and capabilities to support the de-risking of new technology projects, thereby enabling investors to deploy their capital, much of which is currently ‘gridlocked’, the technology to be mobilized, scaled up and a path to commercialization accelerated.”

Insurance solutions could encourage additional focus on the risk quality and selection of decarbonization efforts for commercialization, in addition to helping companies unlock necessary capital.

The developing carbon market also offers unique opportunities for businesses and insurers, and carbon credits could help companies meet their emissions goals. “I think there is a recognition that purchasing carbon credits can be a legitimate part of a decarbonization strategy — if companies have done everything within their power to reduce their emission footprint across scope one, scope two and scope three emissions, and if they only apply these carbon credits towards residual emissions that just simply cannot be removed or reduced through operational efficiencies alone,” Moudrak says, adding that proceeds from carbon credits could be help achieve biodiversity and social benefits as well.

Critical to decarbonization efforts is cross-industry collaboration and working together with private and public sector entities. “Every player has a role to play, and insurance shouldn't be an afterthought,” Moudrak says.