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Climate Change & COVID-19: global challenges shaping our lives

COVID-19 and climate change: two global challenges that are shaping how we work, think, and live.

Although they both have a major impact, they are evolving at different speeds – with one already affecting all of our daily lives significantly, and the other advancing slowly but steadily and becoming increasingly evident year after year.

Both threaten our health and economy, but also offer us an opportunity to rethink the way we do business. For instance, we can use data to pick suppliers with the lowest carbon footprints, transforming the supply chain while at the same time helping mitigate climate change. And these actions can be beneficial in other ways. As the current health crisis has shown, sustainable, resilient, and smart corporates in the financial industry have a competitive advantage.

Getting serious about climate change

Fortunately, a growing number of re/insurers, including Swiss Re, have publicly announced their support of the Paris Agreement. They committed to transitioning their investment portfolios to net zero greenhouse gas emissions by 2050. And, more recently, they made the same commitment for their insurance portfolios. This paradigm shift to account for sustainability could also be seen earlier this year in finance when Larry Fink announced that BlackRock would make sustainable funds the "standard building blocks" of client portfolios whenever possible. Also, the World Economic Forum in 2020 made mobilizing business to respond to the risks of climate change and biodiversity protection one of its key themes. Swiss Re's CEO Christian Mumenthaler returned from the Forum optimistic that business leaders were finally getting serious about climate change. They have good reason to – analysts expect that laggards in adapting to the changing risk landscape will miss a competitive advantage.

Just as we had previously known of the risk of a global pandemic, scientists have warned for a long time about the impact of global warming and the urgent need for more sustainable business models. Global warming and urbanisation are the main causes of the increased risk of natural catastrophes. We live, build and work in locations most at risk from floods, storms, wildfires and extreme weather events. In cities or towns along the coast, on floodplains or near wildland – climate change is increasing the risk in these areas, making weather-related disasters more likely and more severe. The Swiss Re Institute estimates USD 137 billion losses in 2019 due to natural catastrophe in its sigma report. With almost two-thirds of the damage uninsured, this protection gap leaves millions of people and businesses exposed to these risks and more likely to face financial difficulty following an event.

Supporting the transition towards a low carbon economy

As a leading re/insurer, Swiss Re supports the transition towards a low carbon economy by protecting massive renewable energy projects and helps societies get back on their feet after natural catastrophes, which are now more prevalent and severe as a result of climate change. As the pace and magnitude of certain risks make them challenging to insure by nature, businesses need to adopt comprehensive risk management approaches ranging from prevention to adaptation measures to stay resilient.

Managing and monitoring the risks and opportunities associated with environmental, social, and governance factors (ESG) is just as important. At Swiss Re, we continually adapt to the changing risk landscape and aim to address these factors in all aspects of our business.

We put our Sustainability Risk Framework in place in 2009, which includes our thermal coal policy. Moreover, we extended this framework to major players in the oil and gas industry and carbon-intensive companies. We are committed to reach net-zero emissions by 2030 in our operations and will further reduce the carbon intensity of our investment and insurance portfolio.

Helping companies mitigate and adapt to climate change related risks

Swiss Re Corporate Solutions supports the corporate world mitigate and adapt to climate change. For example, we have insured more than 60 offshore windfarms, offer a solar revenue put in cooperation with kWh Analytics that covers solar production and revenues, and have structured a parametric windstorm coverage against hurricane damage to rooftop solar panels. We also go beyond with innovative solutions such as bonds to rehabilitate mines and public-private partnerships.

In Germany, a significant share of our Engineering & Construction portfolio is composed of renewables, mainly windfarms, and we cover the growing Asian market by protecting large offshore wind farms in Taiwan. And should the water levels of rivers in Europe rise or fall too much, we offer a parametric solution called FLOW to corporates with manufacturing sites or tourist cruisers.

Advancing sustainable supply chains

Additionally, the digital landscape brings exciting new opportunities to make the world more resilient through data. We now have access to readily available, reliable, and credible data to facilitate the protection of assets like windfarms or construction sites against extremes in rainfall, wind, water levels, and weather temperatures. Big data and the development of supply chain standards and guidelines are also key for advancing sustainable supply chains in many industries.

Sustainable investments and innovation

After all, facing the challenges of climate change will unleash significant investments by corporates and governments to mitigate global warming and hence create opportunities for new business models. More than USD 10 trillion are expected to be spent globally on wind and solar power by 2050 with the aspiration to have these technologies supplying almost 50 percent of world electricity by then.

This will be mirrored by significant investments in the fields of energy efficiency, battery storage, sector coupling and power-to-x technology. From large oil & gas players investing in offshore wind, to chemical companies stepping into the world of green hydrogen, the renewable energy transition is linking industries in entirely new ways.

And this is just the beginning: with the price of CO2 emissions rising in the future, hard-to-abate sectors, such as heavy industries, are likely to invest in carbon capture storage (CCS). As recent pilot projects in the Netherlands and Germany demonstrate, the new "hydrogen economy" will be highly integrated and require a shift in mindset from insurers.

Risk takers will have to focus on holistic industry solutions which blend traditional products covering project, transport, operational, liability and credit risks with innovative risk solutions protecting against the volatility of weather or hedging against price risk.

However, optimism and realism have to go hand in hand. As the International Energy Agency (IEA) recently announced, 2020 has seen the largest decline in energy investment on record – roughly USD 400 billion less than 2019. Hence, initiatives like the EU's European Green Deal, the North Seas Energy Partnership as well as Germany's Hydrogen Strategy are needed more than ever. If governments pursue a green stimulus recovery, chances are that COVID-19 could be the catalyst for the world's energy transition.

We look forward to advancing the paradigm shift in the re/insurance industry by applying sustainable practices when working with our customers. Likewise, we see it as our duty to share our knowledge with governments on how to make societies more resilient. We believe that we can achieve a brighter future if we collaborate transparently and efficiently together.

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climatechange covid19 supplychains renewableenergy innovation

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​sigma 6/2020

De-risking global supply chains