2021 will be the year in which nature loss and climate change combine in the re/insurance industry as one of the most significant inter-linked systemic risks facing humanity, business and the global economy, predicts Clyde & Co.
In an article that is part of its “Market Insight: Insurance 2021 – The year ahead” series, the international law firm says that 2021 will see the launch of the Taskforce on Nature-related Financial Disclosure (TNFD). The TNFD is formed by a partnership between Global Canopy, the United Nations Development Programme (UNDP), the United Nations Environment Programme Finance Initiative (UNEP FI), and the World Wide Fund for Nature (WWF). The idea for a TNFD began in January 2019 at the World Economic Forum’s Davos meeting.
Operating in parallel with the TCFD (Taskforce on Climate-related Financial Disclosure), the role of this new government-funded taskforce will be to establish a framework to support businesses to make nature-related financial disclosures by the end of 2022.
Examples of some nature-related risks already in the public domain include the BP Horizon platform oil spill, the collapse of the Vale tailings dam, the liabilities and subsequent bankruptcy of PG&E post the California wildfires and ConocoPhillips’ re-freezing of artic permafrost to facilitate ongoing oil drilling.
From an exposure perspective, the attention of re/insurers is likely to focus on nature-related litigation, damages, compensation requirements, pollution impacts and changes in regulation and reporting requirements. Re/insurers will also be aware that damage to the natural world will accelerate climate change and reduce the capacity to mitigate it. Over the longer term, the likely inability of nature-damaging companies to attract finance will impact the investment side of the re/insurance balance sheet.
Businesses expected to be most impacted by the new requirements will be global or national businesses whose supply chains impact natural resources including forestry, water or local populations. As the taskforce formulates a framework around nature risks (including physical, regulatory, market and reputation risks) so the financial consequences will be brought more sharply into focus. As with TCFD, reporting is likely to remain voluntary until the financial impacts of nature risk capture investor and public attention – likely within the next five years.
The re/insurance industry is unlikely to welcome further regulatory insight. However, as the global economic impact of nature losses and the associated decline of ecosystem services (water, energy, food and carbon sequestration) is made clear, so the industry will need to be ready to respond, says Clyde & Co.