COP21 agreement delivers upside and downside risks for business

Businesses and their risk managers will need to respond to the agreements obtained at COP21, which commits governments around the world to restrict global warming to 2.7°C by the end of this century. This will see global warming reduced from an estimated 4.8°C if no action is taken. Experts say the agreement will trigger regulatory changes in many of the 189 signatory countries. Trade associations in regions such as the European Union (EU) have already raised fears about a regulatory onslaught. Large companies will also find themselves under pressure to change their procurement policies in order to meet the demands of investors and public opinion. In addition, they will need to keep an eye on their supply chains. In response to the COP21 agreement, many suppliers will need to adapt their production and put a premium on sustainability. Speaking to Commercial Risk Europe, Edward Cameron, the New York-based managing director at non-governmental organisation Business for Social Responsibility, said: “[The agreement] represents a very different regulatory environment for companies around the world. This new regulatory environment is set to be very complicated for groups with very large and diverse value chains.”hideEach one of the country signatories will implement its own national action plan to meet the goals of the agreement. The emphasis will vary from country to country. But it appears that companies will have a voice in this process. According to Mr Cameron, the fact that the private sector will be involved in discussions is one of the key developments agreed at COP21. President of the Association pour le Management des Risques et des Assurances de l’Entreprise (AMRAE), Brigitte Bouquot, believes this is a positive step. State action alone will not be enough to meet the goals of the agreement, she said. “I do not believe that the key to meeting COP21 commitments will be more regulation driven by state policies,” said Ms Bouquot. “If we succeed with the energy transition, it will be thanks to civil society and to innovation brought about by companies.” Ms Bouquot urged companies to keep climate change risk high on their agendas. “Because of the COP21 agreement, we will avoid the big catastrophic scenario of a 4.8° increase in temperatures by the end of the century,” she said. “But whatever the scenario, companies have to be aware of natural events, improve their risk management processes and try to be better insured.” It is abundantly clear that companies will have to adapt to the changing energy mix demanded by the COP21 agreement. They will, for example, have to listen to activist investors that are already calling for the use of renewable energies. Companies that do not respond could deny themselves access to important sources of funding. In mid-January, a group of investors led by the pension fund of the Church of England and the New York State Common Retirement Fund urged oil giant Exxon Mobil to clarify the extent to which it is prepared to meet the requirements of COP21. “The unprecedented Paris agreement to rein in global warming may significantly affect Exxon’s operations,” said Thomas DiNapoli, the New York State Comptroller, in a statement. “As shareholders, we want to know that Exxon is doing what is needed to prepare for a future with lower carbon emissions. The future success of the company, and its investors, requires Exxon to assess how it will perform as the world changes.” Pressure will also mount on companies as they compete for government contracts and are likely forced to ensure global supply chains are environmentally friendly. A growing number of governments may put sustainability requirements higher on their procurement priority list. As a result, large swathes of the economy could be affected, particularly in some parts of the world. Mr Cameron noted, for instance, that in the EU and China around 19% of gross domestic product is delivered from public procurements. “We should see, in the course of the coming years, governments make use of their public procurement options to drive low carbon development,” he said. “Similarly, corporate procurement is enormous in terms of the distribution of large-scale financial support for this [energy] transition. Major multinationals have substantial supply chains, with suppliers spread all around the world, which they can influence with their buying decisions.” So while there is clearly downside risk for companies as a result of the COP21 agreement, the commitments made should offer opportunities for those that position themselves as part of the solution. First, many investors are likely to favour environmentally friendly companies. And second, the agreement’s signatories have pledged to raise $100bn of finance each year to develop renewable energies, with particular focus on emerging economies. According to Mr Cameron: “We’ve seen in Paris the beginnings of a thriving, clean global economy. The money pledged in Paris represents seed capital for this. It will help direct investments, particularly from financial services, away from high carbon development and towards non-carbon development.” “A whole new global economy has been created in the space between 4.8° and 2.7° [of global warming]. It represents trillions of dollars of investments,” he added. The insurance industry is one sector of the global economy that has been specifically asked to help reduce global warming and mitigate its threats. The COP21 agreement stresses the need to develop mechanisms to mitigate damage caused by climate change, especially in emerging economies. Article 8 lists “risk insurance facilities, climate risk pooling and other insurance solutions” as areas in which cooperation between the signatories can focus. “COP21 opened up a lot of doors to bring insurance [in] as part of the solution for climate change,” said Peter Höppe, head of geo risks research at Munich Re. Mr Höppe noted that even before the conclusion of COP21, the G7 group of countries had announced $420m of additional funding for Insuresilience, a UN-sponsored programme that aims to provide insurance against climate risks in poor economies. “The Paris agreement has taken this commitment one level higher,” he said. The insurance industry can play a key role in helping companies tackle the challenges thrown down by the COP21 agreement by developing new products, he continued. “Several years ago we started developing new insurance policies for investors in clean energy,” Mr Höppe pointed out. “Renewable energies are key to solving the problem, and if we can take some of the risks from investors we can incentivise wind farms and solar parks.” He added: “We have some delivery guarantee policies, for example, that make sure that investors get some money if there is not as much wind or sunshine as projected for a period of time. There is also insurance against the premature ageing of the equipment in renewable energy production.” Demand for this kind of coverage is set to grow as more investors strive to put their money in projects that comply with COP21. Munich Re itself is targeting €8bn of investments in infrastructure and renewable energy in the forthcoming years. “Investors have perceived that in the second half of the century it will be harder to make money with carbon, oil or gas,” concluded Mr Höppe.

COP21 agreement delivers upside and downside risks for business

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