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Jan 2023

The Geneva Association - Nature and the insurance Industry: Taking action towards a nature-positive economy

Source: Asia Insurance Review | Jan 2023

The sustainability of natural capital is vital for socio-economic development and prosperity. Yet, nature has systematically been considered an externality – undervalued and mispriced by the public and private sectors. There is clear and concrete evidence of the large-scale impacts of nature degradation due to human activity, as well as the significant implications for people and businesses. This is driving considerations around large-scale nature degradation and biodiversity loss into core business decision-making, say The Geneva Association’s 
Dr Maryam Golnaraghi and Mr Adrien Mellot.
Assessing and valuing biodiversity and ecosystem services is complex and still under development. However, the most comprehensive estimates suggest that nature provides a value of $125-140tn per year. Over 50% of global GDP is dependent on natural capital and ecosystem services, but many of those ecosystems are close to tipping points, beyond which they may be unrecoverable.
Nature and climate change
Climate change and large-scale nature loss are interlinked. The protection, improved management and restoration of ecosystems can simultaneously increase climate resilience (climate change adaptation) and help to sequester carbon (climate change mitigation). At the same time, the deployment of new technological solutions to transition energy and other sectors to achieve net-zero targets could have profound impacts on nature. As the world expedites the large-scale deployment of these new technologies, their environmental footprint should therefore be assessed and managed with a full life cycle view.
Nature-based solutions should be considered an integral part of the design, construction, operation and maintenance of critical infrastructure systems to reduce extreme weather risks and increase resilience. As we look ahead, the public and private sectors need to invest in sustainable infrastructure systems (e.g. energy, transport, water management). There is also a need to mobilise capital for upgrading existing infrastructure systems and investing in new ones.
Reducing greenhouse gas (GHG) emissions cannot be done at the expense of nature loss and other environmental impacts. Ultimately, addressing climate change and nature and biodiversity loss together with a system-based approach will be necessary if either is to be solved.
Factors driving nature-related considerations into core business decision-making
A number of external factors are transforming nature-related risks and opportunities into a core business issue: 1) the evolving public policy and regulatory landscape, 2) efforts to quantify the financial risks associated with nature loss by the Task Force for Nature Related Financial Disclosure (TNFD), 3) sustainable finance frameworks, 4) financial regulatory bodies’ increasing attention to the risks of large-scale nature loss, 5) rising litigation, 6) the incorporation of nature-related issues in corporate, sovereign and municipal credit ratings and 7) growing investor and shareholder awareness (Figure 1).
Factors driving nature-related considerations into core business decision-making
The insurance industry and nature-related risks and opportunities
The speed, scale and scope of nature and biodiversity loss present new risks and opportunities for re/insurers. The Chief Risk Officer (CRO) Forum identifies nature and biodiversity loss as an emerging, ‘medium category’ environmental risk for re/insurers, with significant potential impacts expected within the next five years.
These risks could impact re/insurers in a variety of ways:
1. Underwriting
For P&C re/insurers, pricing and insuring risks may eventually be an issue. Nature risks directly impact their business models by affecting their customers’ resilience to extreme events. Rising large-scale nature loss and pollution impact commercial lines, with potential, rising litigation against corporations in these sectors. For life insurers, there is growing evidence of the link between nature-based risks and air pollution, food security and malnutrition, the increased transmission of vector-borne diseases and even pandemics.
2. Investments
The financial performance of assets is directly impacted by physical climate risks, transition risks, litigation risks and the ability to transition to a nature-positive economy. This is particularly relevant for life insurers given the long-term characteristic of their investments.
3. Real assets and operations
Physical risks to assets, buildings and staff may increase due to large-scale nature loss in specific regions.
4. Risk assessment, modelling and pricing capabilities 
Effectively assessing and quantifying nature-based risks requires forward-looking tools, which are currently lacking. The industry is, however, supporting initiatives to develop such tools, and re/insurers can draw on their years of experience in NatCat (natural catastrophe) modelling.
Acting now can reduce current and future exposure to nature-related risks and lead to business opportunities; delaying action could exacerbate the risks to a point of no return. Re/insurers can encourage behavioural changes for the preservation, restoration and management of nature, and support their insureds and investees to develop more resilient, GHG (greenhouse gas)-neutral and nature-positive business models. They also have an opportunity to increase the resilience of their clients through underwriting and investing in nature-based solutions (Figure 2).
Opportunities for re/insurers to support a nature-positive transition
While some re/insurers have already started to assess, understand and quantify the risks and opportunities related to nature-based systems, the industry can go further by helping to shape more nature-positive behaviour. We recommend that companies:
Explore, identify and assess the materiality of nature-related risks in their business models. Re/insurers can engage in global efforts such as the TNFD to identify methodologies, 
share lessons learned and help expedite convergence towards best practices.
Further explore the links between nature-based solutions and climate change adaptation and mitigation measures. Addressing nature and biodiversity loss together should be an integral part of companies’ net-zero transition strategies.
Raise awareness among insureds and investees, as well as internally among the board, executive management and employees, about the scale of nature-related risks and biodiversity loss to incentivise more sustainable behaviours and business models.
Explore opportunities for new product and service innovation to mitigate nature loss and its impacts. It is important to consider the interactions, feedback loops and competing interests of various industries around nature and climate change, and engage with other sectors such as banking, IT and digital communications to assess and price these risks.
Consider the environmental risks associated with producing new climate technologies for decarbonisation when underwriting and investing in their large-scale deployment.
Identify and potentially realise investment opportunities in nature-based solutions that would lead to increased resilience and carbon credit benefits for clients, as well as their own business models.
Recognise the shortfalls in the availability and accessibility of data and tools to quantify the risks and benefits tied to nature-based systems. Consider industry-level collaboration and engagement with regulatory bodies to identify major data gaps and expedite the development of forward-looking methodologies for nature-related risk assessment. A 
Dr Maryam Golnaraghi is director climate change and environment withThe Geneva Association and Mr Adrien Mellot is former climate change and environment intern with The Geneva Association.
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