In this final piece of the three-part series, Insuring against Climate Risk, we will explore possible solutions available to help corporations manage their climate-related physical, transition and liability risks. Learn more about our previous physical risks and liability risks articles.

What are Transition Climate Risks?

As a party to the Paris Agreement, Australia has committed to the global goal of holding the increase in global average temperatures to below 2°C of warming and pursuing efforts to keep warming to less than 1.5 °C. The Australian Government's 'Net Zero Plan' will guide the just transition to the legislated target of 'net zero' emissions by 2050.

Transition risks arise from actions taken by a business to reduce emissions, mitigate climate change and adjust to a lower emissions economy. According to APRA's CPG 229 Climate Change Financial Risks, 'transition climate risk' is defined to include 'risks related to changes in domestic and international policy and regulatory settings, technological innovation, social adaption and market changes, which can result in changes to costs, income and profits, investment preferences and asset viability.' ASRS S2 contains a similar definition of climate-related transition risks for mandatory climate-related reporting purposes, pointing to examples 'such as increased operating costs or asset impairment due to new or amended climate regulations [and] shifting consumer demands and the development and deployment of new technology'.

Transition risks may pose varying levels of financial and reputational risk to businesses. Climate-related transition risks and their potential financial impacts include:

• Policy and Legal Risks: for example, increased pricing of greenhouse emissions, enhanced emissions reporting obligations and the regulation of existing products and services can lead to increased operating costs and or stranded assets;
• Technology Risks: for example, the cost to transition to lower emissions technology can lead to stranded assets, reduced demand for products or services and increased costs to adopt or deploy new practices or processes;
• Market Risks: for example, changing customer behaviour and the increased cost of raw materials can lead to a reduced demand for goods and services, increased production costs due to changing input prices (e.g. energy, water) and output requirements (e.g. waste treatment) and re-pricing of assets (e.g. fossil fuel reserves, land valuations); and
• Reputational Risks: for example, shifts in consumer preferences and increased stakeholder concern can result in reduced revenue from decreased demand for goods or services, decreased production capacity (e.g. supply chain interruptions) and or negative impacts on workforce management (e.g. employee attraction and retention).

Relevant Insurance Solutions?

Insurers have been developing new solutions to help businesses manage these new transition risks and adapt their existing coverage.

Energy Efficiency Insurance

The retrofitting of energy-saving measures into existing buildings is a key priority for reducing carbon emissions.

Energy efficiency insurance seeks to support these measures by removing the performance uncertainty of an energy-saving retrofit and thus make the financing of such projects more attractive to potential investors.

For example, HSB has developed energy efficiency insurance which provides cover for:

• material damage (including equipment breakdown) to the installed energy-saving system;
• business interruption, protecting against loss of revenue that would otherwise have been generated by such energy-saving projects, caused as a result of equipment failure or damage; and
• asset performance insurance covering any shortfalls in anticipated annual energy savings as a result of deficiencies in the installed energy saving systems or measures.

Carbon Market Insurance

The Australian carbon market has two main parts: a compliance market (i.e. required by legislation) and a voluntary market. The compliance carbon market (CCM) in Australia is comprised of the Emissions Reduction Fund and the Safeguard Mechanism. Only the Australian Carbon Credit Unit (ACCU) is eligible for use in the CCM. However, ACCUs and other types of carbon offsets can be voluntarily purchased by Australian entities outside of the CCM to meet their own emission reduction commitments.

Additionally, certain international carbon offsets relating to projects undertaken in one country can be used by organisations in an another country to help them meet their compliance or voluntary commitments. For example, certain types of carbon offsets created under the Gold Standard, Verra and Clean Development Mechanism and purchased by Australian organisations may be voluntary surrendered to assist the purchaser in reaching their goal of carbon neutrality under the Australian Government Climate Active Carbon Neutral Standard scheme, although aspects of the operation of that scheme remain controversial and may well change.

Insurers are developing new insurance products to address the risks involved with emissions trading.

For example, OKA, a leading US carbon-credit insurer, entered a customer agreement with Clima, an Australian carbon solutions platform. Clima can now issue insurance-protected carbon credits which minimise the due-diligence burden on purchasers and protect them from post-issuance risks.

Also, Tokio Marine Kiln is collaborating with Kita, a carbon credit insurance firm, to provide political risk insurance for developers of and investors in carbon credits projects. This policy will provide coverage for losses arising from host countries altering agreements critical for carbon credit eligibility under external offsetting strategies.

Carbon Capture and Storage Insurance

Carbon capture, utilisation and storage (CCUS or CCS) is one technology that can reduce the release of carbon dioxide emissions. According to Geoscience Australia, CCS takes carbon dioxide captured from the burning of fossil fuels and other sources (e.g. cement production, steel manufacture) and injects it deep underground into geological formations including the tiny pore spaces present between grains in sedimentary rocks.

The scientific consensus is that a very significant global scale up of CCS would be required to reach net-zero emissions by 2050. In Australia, only one significant CCS project is currently operational and there has been controversy and opposition to a proposed CCS project development in the Great Artesian Basin. However, there are other CCS projects currently in development across the country.

The insurance industry has recently launched products, which have been specifically designed to address the unique challenges of CCS projects. These new solutions seek to address critical insurance limitations that have hindered the growth of the CCS industry. For example, Marsh has a CCS policy which adds a non-damage trigger for the geological leakage of carbon dioxide, indemnification for the costs of corrective measures and a trigger for the associated business interruption. Similarly, Aon's multi-component CCS solution provides bespoke cover that addresses issues with storage reservoir integrity and indemnity for loss of tax credits or requirements to purchase carbon credits associated with CCS leakage.

As the impacts of climate change intensify, it is important for businesses to accurately identify and protect themselves against the associated transition risks through comprehensive risk management processes and or transfer solutions such as insurance.

At MinterEllison, we can assist you and your business with:

• identifying how you (or your suppliers) may be exposed to transition risks associated with climate change, noting your particular vulnerabilities;
• assessing whether there are any coverage gaps in your insurance or alternative risk management solutions; and
• advising you in relation to obtaining relevant risk transfer solutions to fill any gaps such as energy efficiency insurance and or carbon market insurance.

Get in touch with our MinterEllison experts today to identify and mitigate the physical impacts of climate risks for your business.