Risk and reward in the energy transition

Commercial Risk Europe talks to Charlotte Hedemark Hancke, Ferma vice-president, leading Darim member and senior risk manager in customer success risk assurance services at software company SAP, about the risk implications of the EU’s Green Deal, the rise of ESG and the role of risk management associations at a time of crisis. The Nordics has long had a reputation for prioritising sustainability. This was underlined in September when Denmark became the first United Nations member state to pay DEK100m (Ä13.4m) in loss and damage compensation to developing countries for the impact of climate change. According to Denmark’s development minister Flemming Møller Mortensen, it was time for action and not just words. The same sentiment could be extended to risk managers as a wave of ESG-themed rules and regulations come into effect. In 2020, the EU approved the European Green Deal, ushering in a wave of sustainability initiatives across all sectors. There is also the European Commission’s directive on corporate sustainability, which was adopted in February 2022 and requires even more transparency and governance from companies. It will also require more attention from risk managers, said Charlotte Hedemark Hancke, Ferma vice-president, leading Darim member and senior risk manager in customer success risk assurance services at software company SAP. “If you want to ensure compliance with forthcoming EU acts, more resources will be needed within the risk management function as the scope of the risk assessments will be extended. You will need to have a governance structure in place, with the IT systems to support these new requirements,” she said. There may be additional workload from the ESG-related reporting requirements but there will also be benefits, added Hedemark Hancke. “It helps us in the risk management function and it creates a stronger link with purchasing and sustainability teams. The ESG-related risks are more complex to understand, including the extended impact on the supply chain. Furthermore, it will give the business more insight into risk at an enterprise level, as well as a holistic view of the value chain and the environment we operate in.” There are also the change management challenges that come with any new regulatory initiative. “We still see this resistance when we talk to a risk owner but they need to consider the ESG impact. Normally we only consider our own exposure but now you have to expand that to your supply chain. It is not just about short-term profitability but also long-term sustainability,” said Hedemark Hancke. For example, there are numerous ESG-related investment risks, such as a company’s inability to attract funding or investment because it does not meet certain sustainability standards. “It is a challenge for risk managers to deal with this process,” said Hedemark Hancke. “In 2021, we started to assess non-financial risks and look at mitigation measures and decide what we could disclose. It created a lot of internal attention and more visibility on ESG. We also ran workshops to create stronger internal alignment and not these departmental silos. “And for external reporting, we have advanced risk systems and a new impact category to enable the capture of ESG risks. These risks may not affect SAP directly – it is more about the wider environment,” explained Hedemark Hancke. rising to the challenge She also believes risk management associations such as Darim and Ferma can help their members rise to the ESG challenge. “We had an open dialogue with Darim members and intend to set up smaller working groups – a process that is only just starting. Companies have to prepare themselves for those Green Deal rules, because they will come,” she added. Ferma published a whitepaper, Insuring the Transition, on 12 September, which calls on the (re)insurance industry to do more to support its corporate clients in making the transition to carbon neutrality. According to the whitepaper, businesses are suffering restrictions on insurance coverage for their transition activities in three ways – limited or unavailable cover, lack of coverage for specific technologies or materials, and exclusion of specific risks. There is also fear that more stringent regulatory and reporting requirements will be beyond many smaller companies and affect their ability to get insurance. “The concern is if we see insurers engaging only with companies that have completed their ESG reports,” said Hedemark Hancke. This could reduce insurance uptake at a time when the relationship between insurers and companies is already deteriorating and could get worse, given the economic challenges ahead. “When companies face economic challenges, it has a budgetary impact and that might reduce insurance buying. The risks to be covered are still the same if not more but there is a smaller budget to cover them,” said Hedemark Hancke.

Risk and reward in the energy transition

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