With record heatwaves, drought, wildfire and other perils, how can the insurance industry protect and fuel innovation in the face of climate challenges?
Featured in this episode:
Petra Schmidt, global industry leader, Enterprise Client Group
Liz Henderson, global head of Climate Risk Advisory
Additional Resources:
Special Edition: Preparing Business for Changing Weather
Climate Analytics Unlock Capital to Protect People and Property
2024 Client Trends Report: Better Decisions in Trade, Technology, Weather and Workforce
Tweetables:
Intro:
Hi everyone, and welcome to the award-winning “On Aon” podcast, where we dive into some of the most pressing topics that businesses and organizations around the world are facing. Today, we hear from Liz Henderson for insights into how climate risk impacts the workforce and the hot topics from the New York Climate Week. Now, please welcome this episode’s host, Petra Schmidt.
Petra Schmidt:
Hello, everyone. My name is Petra Schmidt and I'm the global head of industry in the enterprise client group at Aon. Last year saw record heat in 24 countries and territories, and 16,500 fatalities globally. In addition to heat waves, we're seeing the impact of other chronic climate-related perils, including drought, wildfire, and freeze.
Leaders recognize the climate challenge, but they aren't doing enough. The insurance industry is the secret ally in providing data, advice, and capital to both protect and fuel innovation. With me today to discuss this is Liz Henderson, global head of Climate Risk Advisory. Thanks for being here today, Liz.
Liz Henderson:
Thank you for having me here, Petra.
Petra Schmidt:
So, in our discussion, we're going to walk through several questions. How does climate risk impact the workforce, how can carbon-heavy industries tackle climate, and what can experts help provide? So, let's get started. Let's first talk about people. When organizations talk about climate risk, we can often forget how it impacts our employees. What are some implications of climate risk that companies should be thinking about?
Liz Henderson:
That's a great question, Petra, and you're absolutely right that people often don't consider the climate change impacts on the health and wellbeing of our employees, and any organization that is starting to see and experience some of the extreme events, extreme heat, and the impact that those conditions have on their ability to be resilient in the face of climate change are starting to actually feel the pain of ignoring the implications of climate on people.
When we think about climate change, we really have to understand not just the impact of climate on extreme events, on the frequency and severity of those events and when they occur, but also the holistic, sort of intangible impacts that climate can have on people. One really great example is if you think about heat stress. Heat is a peril that is often underrepresented in climate models, because climate models tend to focus on those extreme hurricanes, tornadoes, and flood events, but heat is going to impact people before it starts to really impact anything else.
The extreme heatwaves that occurred in Europe in 2022 are estimated to have killed more than 60,000 people, and these types of events are happening with more and more frequency. The extreme heat waves that were experienced in the southwest United States last summer, when Phoenix, Arizona had more than 30 days of record high temperatures, are going to occur once every 15 years, according to some climate models, whereas before the impacts of climate change, those types of extreme heat waves were estimated to be occurring once every 250 years. So that increase should play into how organizations are thinking about how climate affects their ability to stay open for business.
Not only that, but we know that heat has an effect on employee productivity and health. Heat is becoming much more strongly linked to comorbidity impacts. So, if you have cardiovascular disease or other types of health issues, heat can exacerbate those conditions. In addition to that, some research shows that for every day above 95 degrees Fahrenheit, employees lose about 40 percent productivity. Some estimates say that the US economy is already experiencing about $200 billion in loss to GDP due to heat per year.
So it's important to think about how heat plays a factor into your talent plans, how does it play a factor into your workplace safety planning, and ultimately, how does it impact your overall risk management program to make sure you're protected in terms of the rules, that you're applying to protect your employees, and also, how does it affect the benefits that you should be offering your employees, so that you can keep the business running, increase your resiliency about these types of events?
Petra Schmidt:
That's so interesting, and that I think gives us a lot for our clients to think about, in terms of both risk management on the property side, as well as clearly, the health and productivity of their employees. I think if we now turn to carbon, so in addition to what we just talked about, carbon is a hot topic for companies facing climate change. Many industries are naturally big producers of carbon and are facing extra challenges in reducing or neutralizing. What are tangible steps that these kind of industries can take now?
Liz Henderson:
Yeah, that's a great question as well, because I think there's a couple of different ways in which we're seeing organizations try to understand their carbon footprints, and what their overall strategy is around reducing that carbon input, footprint. Now, what I think about in terms of the insurance industry and the impact that your carbon footprint has is there's two sort of issues that clients are facing. First is there are many challenges that are facing organizations with large carbon footprints today, in terms of getting assets to reliable, consistent, and efficient insurance capital.
Insurers are taking a look at their own portfolios to understand their carbon footprints and have made commitments to achieving net zero themselves. And so that creates a tension for our clients who are also trying to transition. So we are working with our clients to really help them understand their transition plans, and then articulate those plans against insurance capacity, so clients can understand where the market is going, what the market expectations are, and how they can position themselves relative to their peers within their industries to get access to the best and most secure insurance capital out there.
So having a tangible, quantifiable transition plan is part of your risk management strategy, and is part of your insurance strategy, and is a really important way in which insurance plays a significant role in transitioning. The other kind of side of the equation is: what are companies able to actually do to achieve net zero? If you look globally, many countries are moving at different paces in terms of their own regulatory mandates around disclosure and transition plans. These plans also vary by industry. So, depending on what sector of the economy you're sitting in, you may have a very clear ability to control your transition plan, but you also may not.
And so companies who are making commitments to net zero by 2030 and 2050 are ultimately going to be faced with a challenge around how do they actually achieve net zero through just reducing their carbon footprint, when they will also have to invest in some carbon offsets or green technologies, in order to create a true net zero portfolio? So, you're not going to be able to see a net zero company without that investment into a carbon offset, but with that growth of that carbon offset market, we know insurance is super critical to make sure that the market is stable and that the credits you're buying are reliable.
There's a ton of volatility that exists in voluntary carbon markets today. That creates uncertainty in the market itself, which creates the biggest challenge for the ability of those markets to truly scale, in order to help companies meet net zero. And so, we're working with our clients and with the insurance market to create new products that are tailor-made and suited to help reduce that risk for our largest corporate buyers of carbon offsets, as well as to inject some stability into the markets themselves.
This is really important in order to make sure we actually are to build a sustainable voluntary carbon market. And if we aren't able to do that, then organizations who have been large purchasers of offsets in the past and whose net zero plan is really dependent on the ability to purchase those offsets are going to be at significant risk come 2030 and come 2050, when those commitments come to fruition.
Please note: In achieving commitments to net zero, it's important for companies to comply with regulatory and disclosure requirements.
Petra Schmidt:
You are an expert in this space, and I think at the beginning we talked a little bit about the insurance industry and Aon being a part of that. Talk to us a little bit about how using expert data advisory, risk transfer solutions, for those listening, how can we help?
Liz Henderson:
Yeah, I think one thing that we think about quite a bit at Aon in regards to climate is how does climate change affect our clients holistically, and what role do we play as an insurance broker to help them navigate all of the volatility and the large impacts that climate is really bringing to their operations? And fundamentally, I think we all understand that insurance is a driver of the economy overall. It's a necessary component for investment to flow into new technologies, to maintain capacity for high-risk communities and business owners. But we really need to lean into that role as an industry. Insurance is your ally, and oftentimes, is the key to unlocking investment into your organization.
So one thing that we really emphasize with our clients is bring your insurance partners to the table early in your planning process. Understand how the insurance industry will look at a new investment, look at your transition plans, look at your opportunities related to climate change, as well as the risks that are inherent to your business, so that you can be better prepared for how the industry is going to react over time. We're seeing a lot of inefficiencies in the market right now, in pockets like California, where insurance capacity for extreme wildfire risk has reduced, due to the extreme losses that have occurred.
We've seen some challenges in the renewables market, where new technologies are difficult to understand by insurance underwriters. So, what our team is really focused on doing is in bringing the data, the analytics, and the insights that insurers really need in order to underwrite new risks and to continue providing capacity to our clients, so they can prepare and articulate their position in the market in a much stronger way.
We invest in the data, we invest in the analytics, and can be that partner for you, so that you can go to a stakeholder group at your board, or your investor group, or your insurance panel, and articulate what your risks are, articulate what your opportunities are, in a way that's consistent and shows that you're a partner for insurers over the long run.
We focus on innovating, so that we can fill in those market gaps that exist. So, where you're having a challenge to get capacity or maintain insurance protection, we're there to really think through, “how do we close those gaps for our clients.” So, I think that's the way that I think about Aon's role, insurance's role as an industry, and then what our team is specifically focused on doing for our clients.
Petra Schmidt:
Liz, that is so interesting, and I recognize we have literally only scratched the surface of this topic. We could go so much deeper into the implications of heat, and productivity, and workforce, what's happening in the voluntary carbon markets, and again, how we can partner with clients using our data analytics advisory and risk transfer services, and perhaps we will do that on a future show.
So, I want to say thank you so much for joining us today. That is our show for today, thank you all for listening. In the next couple of months, we will have episodes focusing on supply chain risk, cyber security, healthcare affordability, and I'm sure we will be coming back to these topics. So, until next time, that was On Aon podcast.
Outro:
Thanks for tuning in to the latest episode of “On Aon” with our episode host, Petra Schmidt, and today’s expert, Liz Henderson, for a discussion of how climate risk impacts the workforce the hot topics from the New York Climate Week. If you enjoyed this episode, don’t forget to subscribe wherever you get your podcasts, and stay tuned for our next conversation featuring industry experts bringing you the latest on topics, including climate risk, workforce wellbeing, ESG trends, and much more. Be sure to check out our show notes and visit our website at Aon dot com to learn more about Aon.