A new whitepaper released by re/insurance broker Howden in partnership with Boston Consulting Group (BCG), has highlighted how the role of insurance has largely been a blind spot in strategic conversations around climate and nature finance, and how the entire insurance value chain can be mobilised to deliver the 2030 goals of the Climate Solutions Roadmap.
In the paper, it explains how insurers have developed many different solutions that can help de-risk finance, unlocking and decreasing the cost of transition finance and accelerating the transition. However, these are largely unknown by financiers, project developers, businesses, and governments.
“This knowledge gap stems from the rapid evolution of these solutions and the tendency to engage insurers late in the project cycle, which leads to missed opportunities to enhance investment certainty and reduce risk early on,” the whitepaper reads.
Moreover, the paper also states that insurance “forms the foundation of the climate capital stack” and it is only by treating it as a strategic priority that the industry can unlock the $19 trillion in investment capital that has already been committed to finance the climate transition through to 2030.
But, the key issue that is highlighted by Howden and BCG, is that too few projects are meeting the risk thresholds required by investors. Therefore, in order to unlock this [$19 trillion] sum, the insurance industry will need to provide more than $10 trillion in additional coverage, including for innovative insurance solutions that will help make climate projects investable.
“It is only by derisking investments in climate technologies and nature-based solutions that businesses, governments, and investors will be able to drive the green transition forward,” the whitepaper added.
An important factor that is addressed, is how traditional forms of insurance are already playing a notable role in supporting climate transition and adaption projects, with property and liability coverage, being a key example, as they are as essential for businesses deploying climate technologies as they are in any other parts of the economy.
But, traditional insurance is not enough to unlock the implementation of new technologies and nature-based solutions at the speed and scale that is required, the paper adds.
Continuing: “Innovative insurance products can give investors the confidence they need to finance both the deployment of mature climate solutions at scale and the development of the new technologies required for net zero. Insurers are in a unique position to help projects deliver commercially by reducing uncertainty in a wide range of areas. For instance, insurers can provide performance guarantees for new technologies (e.g. green hydrogen), protect operating margins from physical climate impacts, and underwrite supplier, contractor, credit, and political risks.”
Furthermore, the whitepaper provides a number of different case studies which illustrate how some of these solutions can have a real-world impact.
One case study in particular centred around Greenbacker Capital, a green energy investment company, who sought to expand its portfolio of wind energy projects but encountered difficulties in securing financing due to concerns over the unpredictability of wind resources.
The whitepaper explains that Greenbacker would go on to implement a Parametric Wind Proxy Hedge with kWh Analytics and reinsurer Munich Re, with the hedge providing financial compensation when wind speeds fell below predefined benchmarks, ensuring steady cash flows despite fluctuations in wind resource availability.
As a result, the hedge enabled Greenbacker to secure roughly 20% more debt capital by stabilising revenue streams, with each dollar of premium resulting in ~$6 of additional loan proceeds. From what we understand, this insurance solution allowed Greenbacker to expand its wind energy projects while attracting more investors, which ultimately contributes more growth within the renewable energy sector.
“The availability of both traditional and innovative types of coverage is critical to the investability of climate-related projects. However, a range of challenges need to be addressed to fully leverage the enabling power of insurance. These challenges are multifaceted and include issues related to visibility, capacity, regulatory environments, the short-term nature of insurance products, and data availability—all of which limit the ability of insurance to reach its full potential as a key enabler of the climate transition,” the whitepaper reads.
In conclusion, Howden, BCG, and members of the Climate Champions Team, stated that businesses should now being viewing insurance as a “strategic priority” and that they should be engaging with insurers early in order to enhance the investability and insurability of their transition plans, as well as to help assess exposure to physical and nature risks.
“Insurance can and should share its leading expertise in forward-looking analytics, using these capabilities to signal the riskiness of different transition projects and to nudge investments towards those that will be more resilient,” the whitepaper added.
