By Swenja Surminski, Managing Director, Climate and Sustainability, Marsh McLennan
Transforming climate risk management is a critical imperative for achieving a sustainable future. As we can all see, climate-related risks are increasing at an alarming rate in many parts of the world. More frequent and severe events pose an increasing, complex threat to society, economic activity and the natural environment. These risk levels are amplified by climate change, nature loss and the continued concentration of people and assets in risk-prone areas.
Conventional strategies and incremental approaches are proving insufficient to address rapidly changing risk levels. The scale and complexity of this challenge requires a proper transformation of climate risk management. We need to deploy solutions in a forward-looking, cross-cutting and collaborative manner; tackle the underlying risk drivers; and frame climate risk management as an investment opportunity.
COP28 offers a unique opportunity for governments and the private sector to collaborate on shifting society from the current reactive to the much-needed proactive approach. Marsh McLennan is uniquely positioned to mobilize for change with its 85,000 colleagues advising business and government leaders in 130 countries. Our experts across four global businesses – Marsh, Guy Carpenter, Mercer and Oliver Wyman – are building climate resilience through innovative business solutions and ongoing initiatives. These include:
- Harnessing co-benefits of climate adaptation by leveraging social, economic and environmental dividends to unlock investment. There is chronic underinvestment in risk reduction and preparedness. Presenting climate risk management as an investment opportunity, rather than a cost, is critical to expanding the financial capacity needed. Mercer’s latest annual Global Asset Manager Survey, to be launched at COP28, indicates that climate resilience and adaptation is gaining traction in the investment community, but efforts to channel alternative sources of funds have been limited, as adaptation has not yet become an attractive investment proposition for private investors.
Realizing co-benefits can help build a stronger investment case. One example is nature-based solutions, such as mangroves, wetlands, coral reefs and urban greening. These offer advantages in the form of averted losses, economic benefits and social and environmental dividends. With the right tools, these can be integrated into financial decisions. Guy Carpenter has launched a wildfire mitigation framework to assess the efficacy of eco-friendly risk reduction strategies such as fire buffer zones and found that these could reduce wildfire losses and insurance costs. Building on this, we are now working with leading conservation groups and local water agencies to assess how to incorporate other nature-based risk reduction efforts into catastrophe modeling and pricing.
- Rethinking supply chain resilience by applying innovative tools at pace and at scale. Climate change is a risk multiplier, triggering cascading impacts across supply and value chains. The Marsh McLennan Flood Risk Index shows how the impacts of climate change on key infrastructure are already visible and set to grow over time, pushing up the risk of supply chain failures: Direct damages can be compounded by disruptions that propagate through supply and value chains, with countries, communities and businesses not physically exposed still suffering from indirect impacts. Marsh and Oliver Wyman’s joint work with clients has shown how innovative, AI-based analysis of shipping and customs data combined with remote sensing and open-source intelligence can achieve elevated levels of supply chain visibility in a small fraction of the typical time, shortcutting months-long processes. With this understanding, organizations can manage risks and raise resilience across their supply chains. This may be through partnering with suppliers to build physical resilience, changing procurement strategies to increase inventories from climate-vulnerable suppliers or diversifying supply chains through the use of insurance.
- Unlocking the potential of adaptation through a shift to a resilience-focused insurance system. When properly designed and implemented, insurance plays a vital role in catalyzing resilience interventions. With integrated strategies that tie risk transfer to risk reduction measures, insurers can provide incentives to promote the deployment of resilience interventions. For example, the purchase of policies can be accompanied by guidance for property-level protection measures or through the adoption of “build back better” principles. We have developed an innovative community-based catastrophe insurance scheme that relies on a parametric insurance cover and can create financial incentives for resilience interventions. The program aims to expand coverage to lower- to middle-income households in New York City through parametric solutions while reducing risk levels through resilience investments.
While at COP28, our team looks forward to supporting the work of the Resilience Hub and further advancing initiatives designed to bolster climate resilience. We plan to launch – in conjunction with the UN Climate Change High-Level Champions – a new report offering actionable steps for how insurers can make climate adaptation a true strategic imperative. We will unveil new product offerings that address climate risks and corporate supply chains, demonstrate how to harness the benefits of nature-based solutions and further the investment case for resilience through our work with asset managers and investors. Perhaps most importantly, we will be bringing a spirit of engagement and learning into our discussions with clients, industry peers, leading NGOs and public sector officials.
Header image: CC BY-NC-ND 4.0 by Adam Sébire / Climate Visuals