Using Climate Data for Better Business Decisions

Using Climate Data for Better Business Decisions
September 11, 2023 7 mins

Using Climate Data for Better Business Decisions

Using Climate Data for Better Business Decisions

Innovation in data, analytics and risk transfer solutions enables Aon to help clients accelerate their investments in decarbonization and climate resiliency and support the transition to a lower-carbon economy.

Key Takeaways
  1. Data and analytics play a crucial role in climate-related decision making and disaster risk reduction.
  2. Risk transfer solutions can help unlock innovation and accelerate capital needed for decarbonization initiatives.
  3. Voluntary carbon markets have to be considered as part of the solution mix to achieve net zero but need a greater degree of investment confidence and scale.

Overview

Extreme weather, rising temperatures and devastating natural disasters have become commonplace around the world. Though slowing the rate of global warming is still possible, companies and governments will need to act quickly to deliver on their climate goals.

How can businesses reduce carbon emissions and build resilience in the face of climate emergencies? Risk management offers a path forward, and insurers are using climate modeling and innovative risk-transfer solutions to help clients navigate in an increasingly volatile environment.

“The insurance industry is at the forefront of this challenge and has been for decades,” says Natalia Moudrak, North America Leader for Aon Climate. As decision makers gather for Climate Week in New York, Moudrak shares how insurance strategies can help to reduce risk, unlock capital and lower carbon footprints.

What is the role of insurance in creating climate change resilience?

Natalia Moudrak: Last year, natural disasters caused global economic losses of $313 billion, and less than half of these losses were insured. The insurance industry models natural-catastrophe risk, provides pre-loss committed capital for disaster response and encourages proactive action to limit losses.

Data and analytics help businesses make better decisions around how to manage climate risk. For example, should our clients allocate more money for disaster-proofing their assets in high-risk areas, and what are the potential returns on investment for taking proactive action? Should they be increasing budgets for disaster response? Should they be looking to pursue alternative insurance solutions to supplement current coverage?

There is also the challenge of transitioning “hard-to-abate” sectors to a lower-carbon economy to limit emissions and slow down the rate of global warming, and insurance can play a significant role here. At Aon, our Natural Resources team has developed a Transition Performance Index. This index helps evidence the trajectory of our clients’ climate transition plans so that (re)insurance underwriters can better understand clients’ commitments to become greener over time. It also helps our clients secure access to risk capital they need over the long term.

Identifying means to de-risk investments in newer clean technology solutions is another important area of focus. Whilst a vast amount of capital may be committed to decarbonization initiatives, mobilizing capital quickly to new technology being deployed or constructed “on the ground” can be challenging.

It’s becoming increasingly important to think of ways to combine risk, engineering, and finance acumen and to work collaboratively across public and private sectors to create more bankable projects, optimizing risk transfer as part of project financing solutions. (Re)insurance should be better integrated into financing decisions; investor economics can be improved by doing so.

Quote icon

Data and analytics help businesses make better decisions around how to manage climate risk.”

Natalia-Moudrak-Headshot
Natalia Moudrak
Head of North America, Aon Climate
What questions are business leaders asking about climate modeling?

Natalia Moudrak: We often get questions about the difference between catastrophe and climate models and their best use cases.

Catastrophe models are an extremely important part of the risk management process in the insurance and reinsurance industry, informing how natural catastrophe risk is quantified and traded in key markets and for key perils and regions. These models use historical data to simulate thousands of scientifically probable events and provide a view of hazard and loss potential at a high resolution so that users can differentiate risk between city blocks, community developments, infrastructure assets and even individual buildings.

Climate models, on the other hand, rely on extremely large scales across space and time, bringing global atmospheric and oceanic observations into simulations that show how changes to environmental conditions may influence future weather or climate behavior. So, to inform the view of future physical climate risk and capture uncertainty, scientists rely on an amalgam of global climate models, which are then downscaled to an appropriate level.

We at Aon recognize the importance of bringing together a) the catastrophe models that have been fine-tuned over decades by the insurance industry and that can leverage historical hazard and claims data to inform our understanding of natural-catastrophe risk and b) the forward-looking climate projections from the scientific community to help our clients make better decisions around current and future climate risk. Aon has created a Climate Risk Advisory team, led by Liz Henderson, to bring together all our existing capabilities and develop new tools for clients.

What is the role of voluntary carbon markets in accelerating the transition to net zero?

Natalia Moudrak: Voluntary carbon markets are rapidly expanding and can represent a significant opportunity to achieve a range of environmental and social impacts. For example, voluntary carbon projects that support nature restoration can deliver not only carbon sequestration benefits but also aid in biodiversity enhancement, help improve resilience to natural-disaster events and help alleviate poverty if the revenues from carbon credit sales are shared with local communities.

I think there is a growing recognition that purchasing carbon credits can be a legitimate part of a decarbonization strategy — but only if entities can demonstrate that they have done everything within their power to reduce their emission footprint across Scope one, Scope two, and Scope three and if they apply carbon credits toward residual emissions that cannot be removed or reduced through operational efficiencies alone.

Also, because voluntary carbon markets are still evolving, market participants — including project developers, investors, buyers of carbon credits and various intermediaries — can be exposed to myriad risks. Insurance can help improve the integrity in voluntary-carbon-market transactions and unlock greater access to capital, supporting the development of high-quality carbon projects. This includes bolstering investment into areas where some investors may be hesitating to go, such as supporting carbon projects in emerging markets, through, for example, political risk insurance solutions.

What can businesses do today to help themselves and prepare for more change in the future?

Natalia Moudrak: To limit the negative impacts of climate change, business leaders need to think about what they can do today to better prepare for and withstand the impacts of extreme weather events such as floods, wildfires, hurricanes and heatwaves. This means modeling risk to understand what it looks like today and what it may look like in the future.

Figuring out how to address climate vulnerabilities can mean spending more money on resiliency best practices to protect people and property and/or securing additional risk transfer capacity to supplement internal budgets ahead of the next big disaster striking.

In terms of transition, it’s about understanding the commitments that have been made to lower emissions and identifying practical actions to get there. It’s also about proper communication of these efforts to internal and external stakeholders — especially for hard-to-abate sectors subject to extra attention and underwriting scrutiny.

It’s important to recognize that climate change is real. It’s happening; it’s not going away — and all organizations need to address the challenges and opportunities it brings.

Quote icon

To limit the negative impacts of climate change, business leaders need to think about what they can do today to better prepare for and withstand the impacts of extreme weather events such as floods, wildfires, hurricanes and heatwaves.”

Natalia-Moudrak-Headshot
Natalia Moudrak
Head of North America, Aon Climate

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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