Climate Risk Management: Strategies for Building Resilience to Climate Change in the Private Sector

Abstract

Climate action failure, extreme weather, natural disasters, biodiversity loss and human-made environmental disasters all rank as top 10 business risks in both magnitude of impact and likelihood (WEF, 2020). This reality presents a myriad of challenges and opportunities for the private sector. The insurance sector, in particular, is in a unique stakeholder position to understand, predict, model and react to the emerging and evolving risks that accompany climate change. Insurers play two key roles for the purposes of this discussion, as both risk managers actively protecting global assets, and as long-term investors, funding the future of our economy (Golnaraghi, 2018). These factors make the insurance industry a critical part of the climate change adaptation and resiliency solution landscape.

Zurich Insurance is one insurance company at the epicenter of this issue. Working in collaboration with Zurich Insurance, our team explored corporate climate risk management strategies and the role that insurance companies, as service providers, can play to support these transitions. Special attention was paid to climate risk disclosure processes and physical and transition risks and opportunities. Through secondary research, we analyzed academic literature, sector-specific frameworks, company reports, and countless other sources on climate change risks and management approaches. Additionally, we researched climate adaptation best practices, capability maturity models, insurance sector strategies in advancing climate resilience, and corporate climate risk management. We also consulted with over 20 subject-matter experts at Zurich Insurance and other organizations involved in the climate risk value chain.

To answer this research question, our team developed a climate risk maturity model and leadership model, built from guidelines and best practices, including TCFD resources, that can be used by companies to assess their readiness to identify and address climate risks and opportunities, and to identify gaps in their capability. Building from the climate risk maturity model, our team then identified more than 100 key organizations in the evolving climate risk value chain. A value chain can be defined as a connected series of organizations and areas of expertise involved in the development and delivery of value to end customers (Oxfam, 2012). For this context, the climate risk value chain is composed of data providers, risk insights providers, research and thought leadership organizations, advisory and consulting firms, risk engineering firms, and knowledge hubs. The climate risk value chain enabled our team to analyze the feasibility and benefits of creating an ecosystem of service providers that corporations can collaborate with to fill gaps in their climate risk management approach, as identified through their assessment using the climate risk maturity model. This research fills a critical gap in the literature on climate risk management and climate adaptation aimed at the private sector. Moreover, the perspective of financial-sector stakeholders, like investors and insurance firms, can offer a strategic angle and interest area for companies to act.