Climate change risks cannot be ignored through Covid-19 crisis

Risk managers cannot afford to ignore climate change risks, despite the immediate Covid-19 crisis, and should be encouraging their directors and officers to maintain climate change on boardroom agendas if they are to thrive in the coming months. Experts speaking at a webinar organised by Commercial Risk warned climate change activists will be working hard despite the lockdowns, and will be looking for those who have lost focus on the issue. Tim Powell, chief underwriting officer international, financial lines at AXA XL, told listeners: “Clearly, Covid-19 is a more apparent and acute risk so naturally risk managers are focusing on that. However, the important thing is that Covid-19 won’t be with us in 12 months’ time but climate change will.” He also pointed out that pandemics like Covid-19 and climate change are arguably foreseeable, so directors should have had strategies and risk mitigants in place to manage that hazard. “That is very similar to the situation with climate change. It is clear it’s happening. It is clear directors should be analysing the risk and identifying the effects on their organisation, and doing something about it," he said. Greg Lowe, global head of resilience and sustainability at Aon, agreed. He said a recent report from McKinsey emphasised that climate change has never been a more foreseeable risk, even in terms of timelines and where it might occur. Answering the question of whether climate change has been forgotten in the face of Covid-19, he warned: “Where it was a tickbox issue it has been forgotten, but where people are taking it seriously, they are going even deeper down that path. It will not go away. Some things have been delayed slightly in terms of climate legislation but other things going forward, for example the greener deal from the EU is going ahead.” Mr Powell added: “The pandemic is an important lesson for directors. They must remember that risks which are pervasive are not something they can ignore.” And Simon Konsta, partner at Clyde & Co, stressed: “Covid-19 has put a premium on all forms of resilience, not just pandemics and climate but also cyber and data breach.” Looking at climate change and the risk of litigation against directors and officers, he said: “It is enshrined in UK law and elsewhere that directors take a long-term look at the risks to their business, so Covid-19 or not, they cannot walk away from their primary function.” Mr Konsta also said: “I have seen an increase in the past couple of weeks of the very financially powerful reverting to the ESG theme, which adds a commercial incentive for directors to deal with these issues upfront and in a clear and transparent way. “There is a wonderful platform for those with a climate agenda to kick on during this period. It would be inconceivable that these highly motivated and sophisticated people are sitting on their hands – they will come out swinging and the climate change agenda will be beating even more powerful in six or 12 months’ time than it did before the Covid-19 pandemic.” For risk managers, there is a strong argument to ensure that directors and officers are properly covered by insurance, said Mr Powell. He warned that with regulators enforcing their rules so actively, directors must keep climate change high on the agenda. In terms of finding the right cover, he suggested: “The starting point for any board is a series of questions and a checklist for climate issues, so more granular planning can occur as a result. “Any director has to be able to demonstrate that climate change factors were evaluated and that risks were identified, and that they considered incorporating risk mitigations within their organisations. That is a defendable position for the director if anything should lead to litigation against them.” He stressed: “Directors have got to do something – a director doing nothing towards climate change is inexcusable but a director doing something, even if it turns out to be incorrect or not as intended, is at least a defensible position.” Mr Lowe added: “If, as an organisation, you are being asked to stress test the financial solvency to climate impacts, who is leading the conversation? Often this falls to the chief risk officer, but you need someone in the c-suite owning this topic. Treating this as, ‘what I need to do comply with?’, rather than thinking about it systemically, could lead to problems.” He suggested risk managers should consider where the greatest threat lies – financial risks, operational or reputational risks? He said: “Are you weighted towards the carbon-intensive or physical asset-heavy. Work very closely with a range of individuals in your organisation to assess materiality of these risks. As an example, there is no sense in focusing on the consumer preference to move away from meat if you are an auto manufacturer. “Think about how climate change will impact on a BCP, or how will it impact on the IT strategy – what does it mean for site and staff locations, what does it mean for business strategy, what about cost of capital? And how do you manage a complex network of colleagues, who will need to own different pieces of this?” Mr Lowe urged risk managers to ensure the risk approach is deeply embedded at every level of the organisation. In terms of finding D&O insurance, Mr Powell cautioned rates are on the rise. He said rates have been “popping up a bit” in the past 12 months as directors face an increase in litigation against them and as the range of risk increases. Mr Powell also warned that prices in Europe might rise a little faster than in the US, reflecting steeper price drops in the past. “Insurers are thinking about the volatility in the claims coming in and the risks of outsized judgements against defendants, particularly in the US. Insurers are grappling with their portfolio and the price of premiums.” You can access the full webinar here.

Climate change risks cannot be ignored through Covid-19 crisis

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