Risk managers step up to craft sustainability strategies

Managing sustainability risks, specifically those related to environmental, social and governance (ESG) strategies, calls for close collaboration among a company’s internal stakeholders, and the risk manager is well placed to help steer the effort and provide valuable input. A company’s insurer is a very valuable partner to support the risk manager with this effort.

Risk managers, who understand their organisation’s risks better than anyone, should not be shy about taking a central role in the company’s work to address long-term sustainability issues. It may mean working with internal stakeholders they are unfamiliar with, but the detailed knowledge of their company’s value chain and expertise that risk managers bring to the effort make them indispensable partners in the development of the sustainability strategy and its implementation.

Insurers bring their expertise and wealth of internal and external data to help shape an approach that strengthens the company’s resilience against events that could disrupt their operations and develop strategies that are environmentally friendly and focused on protecting people and property.

A different approach to risk

Risk managers and their insurers have a common role in identifying, assessing, quantifying and managing sustainability risks while helping organisations structure their ESG frameworks.

An insurer understands that managing sustainability risk differs from traditional risk management in that it considers societal aspects of the risk, various time horizons and the potential impacts of climate change. And, while insurance has long been considered the last bulwark against a loss, there are actually other lines of defence that need to be in place before risk transfer is structured.

Johnson Matthey PLC’s collaboration with Zurich Insurance Company illustrates how the two have worked closely to support the chemical company’s sustainability approach.

Johnson Matthey’s sustainability strategy was developed back in 2007 and augmented in 2021 with a comprehensive list of goals that addressed how the business would deliver products and services that helped customers decarbonise, how it would decarbonise its own operations and what efforts were needed to properly protect people.

While risk managers, as part of their traditional roles, have a responsibility to identify the risks related to all of an organisation’s facilities, suppliers and various assets, Zurich Resilience Solutions approached Johnson Matthey’s climate-related exposures with the aim of assessing the evolution of risks and incorporating their analysis into the company’s sustainability and ESG frameworks. That work included, among other aspects, a societal component of examining local infrastructure by, for example, uncovering vulnerabilities in power supplies or other utilities that could have an impact on the community and by considering some of the health and safety impacts of climate change, such as the increased risk of severe droughts or extreme heat in some locations.

One of the many important elements that insurers bring to managing risks such as those faced by Johnson Matthey is the ability to not just assess risk, but to quantify it. The tools that insurers have routinely used to assess their own exposures have been adapted to provide measurements for customers that reveal the potential impact of climate and other sustainability risks well into the future. The results are a useful component to help organisations develop ESG investment strategies and quantify the potential benefits.

In addition to risk quantification, insurers are in a unique position to bring their expertise to offer practical risk mitigation and adaptation solutions. Building on their experience and long-established expertise in risk improvement programmes for fire, explosion and natural catastrophe risks, insurers can help an organisation develop holistic climate change physical risk adaptation solutions. These ensure that organisations can rely on more resilient assets, infrastructures, and supply chains in their existing business and when making critical investment decisions.

Data sharing helps build resilience

An insurer comes to the task with a wealth of information related to its customer’s claims, underwriting and risks. Adding data from the business creates an analysis based not only on the company’s strategy but on the different objectives of internal stakeholders as well. That information, along with climate data, is integrated into the risk-assessment methodology to help determine how sustainability strategies should be implemented into day-to-day activities.

Data sharing between insurers and risk managers is a powerful component in delivering climate scenarios with meaningful outcomes that align with a company’s sustainability strategy. By considering more than just an organisation’s assets and focusing on supply chains, infrastructure and assets that could potentially be impacted, more resilient operations can be structured.

Collecting data is the first step for risk managers who are considering a sustainability strategy within an ESG framework. Start with basic data, develop a sense of direction and increase the complexity of the analysis along the way, adding more data as needed. It is not a check-box exercise but one that is ongoing and evolving with improved data quality.

Zurich and Johnson Matthey began by examining the company’s facilities and applying insurance-related data to help determine the extent of exposures. From there, complexity of the analysis increased to include the company’s suppliers and value chains. The process is ongoing and provides critical information that can be used in future investment decisions.

Risk managers shape regulations

Johnson Matthey is transparent in its sustainability disclosures, for example in the way it reports on climate change in line with the Task Force on Climate-related Financial Disclosures (TCFD). Many large organisations like Johnson Matthey are faced with increasing sustainability reporting obligations. The company’s ongoing work to set clear milestones and targets, along with strong governance and incentives to embed sustainability across the organisation, mean that it is well prepared to meet future disclosure requirements.

Risk managers, in fact, collaborate with public authorities to help shape regulatory changes. Regulators are often asking for their views and expertise when considering regulatory moves. Risk management industry representatives like Airmic in the UK or Ferma in Europe are often consulted by the regulatory bodies to provide input. It is a welcome dialogue that can help regulators understand the sustainability landscape and the extent to which risk managers can help develop standards and guidelines.

Complex work takes time

Insurers and risk managers understand there is no silver bullet solution to developing a sustainability approach and ESG framework. It is a time-consuming and iterative process, with analysis ongoing over years to reveal where to invest and how to implement strategies.

Because of the complexity of the work, it is clear that from analysis to implementation, companies are best served through a collaborative approach between risk managers and their insurers.

Contributed by Xavier Mützig, group insurance & insurable risk director, Johnson Matthey PLC, board member of Airmic and Ferma, and Amar Rahman, global head climate resilience, Zurich Resilience Solutions, Commercial Insurance, Zurich Insurance Company