Firms urged to embrace innovation to turn EU’s ESG rules into competitive advantage

Climate strategy needed that incorporates risk and opportunity

European companies can turn the raft of EU ESG regulations into a competitive advantage rather than a disadvantage by focusing on innovation and embracing the transition, Italian risk and insurance managers heard at the recent Anra conference.

But they will need a climate strategy to thrive that takes both risk and opportunity into account, and further integrates risk management into business culture, experts added at the event in Milan.

European companies face a plethora of EU rules and regulations that aim to tackle the topic of sustainability, the big theme of Anra’s conference, the transition to net zero and wider ESG issues.

These range from new reporting rules to supply chain due diligence and, of course, environmental targets.

The mounting regulation is concerning for European business, and of course their risk managers, that fear they are being placed at a competitive disadvantage to firms in other parts of the word that haven’t reacted to the environmental and sustainability crises with such gusto. Parts of the business community have called for the EU to row back on some of its new and planned rules to allow European companies to compete on a more even footing.

Mukadder Erdönmez, member of the board of management at HDI Global, explained during his keynote speech at the Anra conference that the EU is trying to drive climate neutrality by 2050 by refocusing or redirecting investors.

“The plan is to have an industry transformation with a climate neutral economy, which means that all of us have to transform. This is defining how we do business and with whom we can do business,” he said.

“So our competitive landscape is changing compared to the rest of the world, the US and Asia and South America, where these regulations do not take place,” said Erdönmez. “To some extent, the ESG topic is driving European companies towards a policy that might not be applicable in all parts [of the world].”

But while the insurer can clearly see the competitive risks involved for Europe companies, he believes this can be turned on its head and become a real opportunity for European firms.

“The competitive landscape is mainly a European problem, where we have a competitive disadvantage. But at the same time, that competitive disadvantage can be transformed into a competitive advantage if we focus on innovation,” said Erdönmez.

He said regulation will force change but also force companies to look at the opportunities. “There is so much space and potential for innovation,” he said pointing to research that finds global investment in ESG will rise from $35bn to $50bn in the next three years. “This is exploding,” said Erdönmez.

“So there is a lot of opportunity for us. I believe that if we manage the risk, we can bring our organisations to a place where we can have resilient and sustainable organisations… but innovation always means risk – opportunity and threat. You, as clients, should concentrate on the opportunities while we should support you,” he added.

However, Erdönmez made clear that insurers will only be able to fully support European clients that comply with the new EU ESG rules because they are subject to the same or similar regulations, as well as pressure from other stakeholders. But he said HDI Global, for one, is ready to partner with companies that have transparent ESG and green plans in place to support innovation.

Fellow keynote speaker Andrew McFarlane, head of climate at AXA XL, agreed that having a climate strategy in place that reacts to the environment is key for businesses to manage climate change risk and grasp the opportunity.

“We have got to recognise that the impact from a changing climate presents risks and opportunity. We need to understand the risks but equally we need think about the way we need to change our businesses in order to take advantage of opportunities that might exist,” he said.

McFarlane pointed to a McKinsey study that found there is set to be $9.2trn of physical infrastructure investment to deliver net zero between now and 2050.

“It is important that we have a climate strategy, recognising the risk that we are exposed to, the changing risk that we are exposed to and the ongoing relevance of climate change on the way we run our businesses,” said the expert. “Without a climate strategy you cannot think through potential risks,” he said.

He strongly advised companies to consider different climate scenarios to help them think about risks mitigation strategies and how they might grasp opportunities.

“Scenarios are a useful tool to show where we might end up and what you need to do as a company. The future is uncertain, with many pathways that need to be considered along with potential impacts that this might have on your business,” he said.

McFarlane also stressed the need to remember that climate change is a systemic risk that will drive “permacrisis from interconnected risks”.

“The pillars that we have for climate risk – physical, transition and liability – are interconnected and so this is a systemic risk. As we evaluate those risks, we must evaluate the interconnected nature between those three pillars,” he told Italian risk and insurance managers.

Lucia Silva, group chief sustainability officer of Generali, also focused on how climate and other ESG risks are interconnected.

“When we think about the climate, we often attribute this concept only to the environment, but we have forgotten that the climate above all has a social impact,” she said.

“Global warming will especially affect the most vulnerable people, with fewer resources to use to protect themselves. It is necessary to be guided by science to find the most effective solutions, also to protect future generations,” she added.

Dorothée Prunier, SVP of environmental risks and head of product engagement and services for international operations at Chubb Climate+, said climate change will undoubtedly mean a “fundamental” change in risk that needs to be embedded in risk management approaches.

She said different areas of risk are going to evolve due to climate change technologies. Production, logistics, R&D, legal, finance, IT and marketing will all be impacted, she said.

“With new technologies it is important to further integrate and grow risk management,” said Prunier.

“Risk managers need to identify first- and third-party risks and then analyse and quantify their impact on the existing business. Next, companies need to address and mitigate the new exposures, measuring the efficiency of measures taken. They must then use their experience to correct any measures that haven’t worked or could be improved,” she added.

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