The Role of the Insurance Industry in Solving Biodiversity and Climate Crisis

The insurance industry can play a significant role in helping reduce the investment risk of nature-based solutions and improve the integrity of carbon offset transactions. This is important, as nature-based solutions such as forestry conservation and restoration projects, can deliver multiple benefits — from climate mitigation to biodiversity improvement, disaster risk reduction and local economic wellbeing.

It is encouraging to see how voluntary carbon markets are helping fuel investments into nature-based solutions. However, carbon offset projects remain subject to a myriad of risks, including natural disasters, pest infestations, environmental pollution and political and regulatory changes. Furthermore, poorly designed projects may even exacerbate these issues.

Recent innovation in insurance solutions can help mitigate some of these risks, encourage higher quality of carbon offset transactions and, ultimately, enable greater capital flows to areas where investment is most critical, such as emerging markets.

Biodiversity crisis has never been more acute

The World Economic Forum finds that $44 trillion of economic value generation (over half the world's total GDP) is moderately to highly dependent on nature, and as a result is materially exposed to the numerous risks stemming from nature loss.

Nature is declining globally at rates unprecedented in human history — and the rate of species’ extinction is accelerating, with grave impacts on people and communities around the world. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) 2019 study found that around one million animal and plant species are currently threatened with extinction, many within decades, a biodiversity decline greater than ever witnessed before. The loss of biodiversity is not only an environmental issue, but also a developmental, economic, security, social and moral issue. At the current rate of nature loss, 80 percent of the assessed targets of the UN Sustainable Development Goals (SDGs 1, 2, 3, 6, 11, 13, 14 and 15) run the risk of not being met.

Another study, which examined land use changes between 1960 and 2019, found that since 1960 there has been a net loss of over 800,000 square kilometers of forest area. When normalized by the global population data, this translates to just half a hectare of forest for every person on the planet left today, from 1.4 hectares that were available in 1960.

With our dependence on nature to provide a range of ecosystem services, the current trajectory of nature loss is alarming. Time is not a luxury we have to figure out innovative solutions to curb and mitigate its worst impacts.

Insurance has a role to play in accelerating and de-risking nature-based solutions

Despite the positive momentum, there are several impediments to mitigating nature loss at scale. For example, often there is a lack of confidence in the ability of nature-based projects to deliver promised benefits. This may be due to lack of high-quality data or a lack of standardization for:

• taking inventory of natural assets,
• measuring their performance to account for the specific benefits they offer,
• assessing their economic value, and
• consistently integrating these insights into land use, asset management, infrastructure and investment decisions.

Improvements in measurement, reporting and verification (MRV) on natural assets is crucial for decision-makers who face tough choices between the conservation and restoration of nature and achieving other pertinent land priorities. Better MRV and better data is critical for integration of natural assets into catastrophe and climate risk models, as well as for the development of innovative insurance solutions that would de-risk nature-positive investments.

ClimateWise, of which Aon is a founding member, recently published a paper on means to integrate nature-related risks and opportunities into (re)insurance underwriting. The paper outlines benefits of developing nature-positive insurance solutions, including:

• The development of new (re)insurance products and services to inform and support nature-related risk management
• The development of new markets and innovative financial products in partnership with wider financial services
• New guidance for public and private adaptation investment in nature-positive measures that consider the long-term benefits of a resilient society, business and economy
• Ongoing sustainability of the insurance business model based on risk pooling and risk diversification for insurers, as well as potentially more affordable premiums or continued capacity for nature-positive clients

In the context of voluntary carbon markets, which are not presently regulated by governments, carbon project developers, buyers, sellers, lenders, investors and various intermediaries are exposed to risks relating to natural disasters, pest infestations, political and regulatory uncertainties, and fraud.

Opportunities exist to apply insurance industry knowledge to help address these risks — bolstering confidence in the integrity of carbon offset transactions and unlocking greater capital flows towards nature-based solutions. Aon is working with our clients and insurance and re-insurance partners to build understanding of the insurance need and develop capacity to support risk transfer. Improved MRV and data will encourage the development of new products, such as performance guarantees for natural assets, which can further facilitate and accelerate mainstream investment into conservation and restoration initiatives.

Insurance industry insights, focused on analytics and risk transfer solutions, combined with the environmental industry expertise and the rise of impact investing can help finance a greater number of nature projects and accelerate the net-zero transition.

To learn more about this topic or speak with one of our nature and climate experts, please contact Aon’s Public Sector Partnership Climate Resiliency Leader, Natalia Moudrak, at natalia.moudrak@aon.ca.