The drive to transition to a low-carbon economy has come under even greater focus in recent months. The need to change course is real and urgent. Nicola Harris, head of energy UK and Lloyd’s at AXA XL, describes the vital role energy insurers have to play in enabling their clients to make this shift.
The energy market is in transition. It’s a transition that needs to happen; there’s both a societal and a regulatory need to find meaningful, measurable ways to reduce greenhouse gas emissions. The energy sector, by its very nature, faces an immense challenge in transitioning to a new model. But enlightened, forward-thinking energy companies have bold plans in place to meet that challenge. And the energy insurance market has a vital role to play in helping them to deliver on these aspirations.
Global targets for emission reductions are ambitious; they need to be if we are to stand a chance of achieving net zero by 2050. Therefore, the energy sector has tough goals to meet in the intervening years.
During recent years, we’ve seen a massive shift in our energy clients’ focus on environmental, social and governance (ESG) strategies. In response to pressure from stakeholders both within and outside of their organisations, coupled with a desire to do the right thing, we have seen energy clients intensify their ESG efforts – and these now, more often than not, form an important part of their underwriting submissions.
Any transition brings with it risks, challenges and opportunities. As an energy insurance market leader, we recognise we have an important role to play at the forefront of this change by supporting our energy clients on this journey.
As our energy clients are evolving, we’re evolving with them. These clients range from oil and gas majors to newer, renewable energy companies – and everything in between – and each insured has their own challenges to meet in playing their part in the transition to a lower-carbon economy.
We want to work in parallel with those energy clients that have credible and robust transition plans. We continue to work with oil and gas companies but they must be able to demonstrate that they’re fully committed to being flexible in their approach and/or using innovation to find ways to reduce greenhouse gas emissions and to move to cleaner energy sources.
In October 2021, AXA strengthened its commitment to fight climate change by announcing an extension of its approach to insuring the energy sector, among other things. These new underwriting guidelines put us at the forefront of the move to cut back on insuring unsustainable greenfield oil and gas projects, as well as Arctic exploration projects. Instead, we’ll support those oil and gas clients making real and ambitious steps to move towards a low-carbon economy.
Insights and understanding
The shift to greener business models is something that’s been happening gradually for some time; this is not a seismic move. We’ve been working closely with our clients as they embarked upon this journey and, along the way, we’ve gathered valuable insights into the risks and challenges they encountered. Nevertheless, going forward we must make sure we collaborate even more closely, so that we can measure our clients’ progress – and, if necessary, hold them to account – on fulfilling their commitments.
There is no one-size-fits-all solution for the need to transition and the risks that may arise. It simply isn’t possible for an oil and gas company to transform itself into a pure renewable energy company overnight, for example. This is a process, not a switch.
This means our discussions with our clients need to take into account the nuances of the transition, what it means for them and how they are going to get there.
Clients will make this transition in different ways, according to their current business models, the jurisdictions and regulatory regimes they operate within, who their shareholders are, and so on. The risk profiles of our clients will, therefore, be different – and will change during the course of their transition journey.
We don’t have all the knowledge yet. We do, however have tools and great depth of experience in underwriting both traditional energy clients and those working in renewables. And we continue to work closely with clients in emerging energy areas to gather reliable, consistent data from which we can derive insights to help improve risk management and our underwriting.
The energy insurance market finds itself at the vanguard of insuring the transition. Many of the lessons we learn from supporting our energy clients through this period of change will inform the way AXA XL works with clients in other sectors, as they seek their own ways to reduce their carbon emissions, use new technologies and develop more sustainable business models.
Taking steps to tackle climate change is vital for us all – insurers and clients alike. AXA XL wants to lead the market for specialty risks while fulfilling AXA’s purpose “to act for human progress by protecting what matters”. The focus for our energy business will be on supporting those clients that share such aspirations, now and for the long term.
Contributed by Nicola Harris, head of energy UK and Lloyd’s at AXA XL