On the bright side of sustainability, risk managers discover opportunity

“As much as climate change presents a challenge to us, and, in fact, sustainability more broadly, it also provides us with a lot of opportunity,” said Alison Martin, CEO EMEA and Bank Distribution.

And despite the sometimes-depressing reports of climate-related environmental damage in recent years, there is growing attention to managing the risks and opportunities presented by climate change and sustainability, said Martin, who described herself as a “realistic optimistic” about the potential for sustainability efforts to make a difference.

She discussed the sustainability outlook in a session at Zurich’s recent Global Risk Management Summit in Switzerland. She was joined by George Quinn, Zurich’s Group Chief Financial Officer. The session was moderated by Hayley Robinson, Group Chief Underwriting Officer at Zurich.

Martin acknowledged that sustainability risks – particularly climate adaptation, resilience and decarbonization – are complex partly because they are interconnected. “It’s quite challenging to think about it, but it doesn’t mean it’s only downside,” she said.

Opportunity under any scenario

Some opportunities will require work to uncover, Martin stressed, while others are readily apparent.

Huge investment opportunities exist, for example, into smart buildings and cities that can control emissions, she pointed out. There is also a demand for technology that can make water usage more efficient and reduce energy waste in agriculture. “The decoupling of the economy from carbon emissions creates massive opportunity,” Martin said.

Zurich, meanwhile, has done some digging that shows there are opportunities even when sustainability outcomes might not be ideal.

“We look at climate a lot, as you’d expect,” she said of Zurich, “and typically we looked at it on a more short-term basis,” Martin said. “But last year we decided we should really look at it on a longer-term,” to determine if actions that look plausible now will still make sense later, she added, and to identify sustainability risks and opportunities under different scenarios.

As part of that work, Zurich considered “bookend” scenarios, Martin explained. One assumed more rapid and widespread government regulation requiring organizations to reach net-zero in greenhouse gas emissions by 2050, and another looked at what would happen if no action was taken towards that goal.

The first scenario revealed transition risk and opportunities as it examined how different industry segments interact under those conditions, Martin explained. The second had more physical risk “because, obviously under that scenario, nothing changes,” she said.

And while the second scenario would result in increasing global temperatures, such a dire situation would nonetheless create investment opportunities into adaptation measures, Martin said. “See, I did say I would try and be optimistic.”

It would take a significant amount of investment into adaptation if nothing is done, Martin acknowledged, because the World Bank estimates that around $100 billion is needed annually for a “two-degree world. And no additional action is way beyond a two-degree world.”

Growing awareness

In many ways, companies are still finding their way in managing sustainability risks and opportunities, according to Quinn.

The sustainability landscape is a bit like the Wild West, Quinn said. “There are so many different people with so many different interests that make it much more difficult than perhaps it should be.”

Around five years ago, sustainability started to become a more regular feature of interactions with investors, Quinn said. “But it still felt relatively clunky, so we would cover everything else and then do the sustainability thing towards the end” or in a separate meeting, he said.

Today, there is more interest in investment opportunities related to sustainability, but, Quinn cautioned, “it feels a bit like a numbers game.” He said he worries that there are increasing efforts among companies to see their sustainability efforts only in financial terms or as a route to profits. “I worry about what it says about finance people if their approach to any problem is to try and work out how to turn it into dollars and cents. However, I think you are going to see more of this.”

Managing reputation risk

There is an expectation among employees and customers that businesses should act responsibly with regard to the environment, Martin said. And, when they say they will but don’t, it will tarnish their reputation, she noted.

“People have been making bold commitments about what they believe in and what they stand up for,” she said. “But the reputation risks we all face for making those commitments is only rising.”

Martin pointed to findings in this year’s Edelman Trust Barometer that showed while six of 10 people distrust everything they read, 77% of those surveyed said they trust their employers. “So, when we stand up to be counted for something, our people listen and they believe us, which heaps a bit more responsibility on us.”

The Edelman report found that 52% of the respondents thought business leaders don’t do enough on climate change, compared with 9% who said leaders were overstepping in that area. “That pretty much says it all – that the onus is on us, reputationally, to continue to do what makes sense, to do what we think can make a positive impact,” Martin said.

She recalled a discussion with a Zurich customer who pointed out that while it’s easy to make sustainability commitments, they don’t count for anything if they aren’t kept. “That was a real wakeup for me around visible, external action rather than visible external commitment,” Martin said.

“It’s very easy to sit internally and look at all of the plethora of things that I know we’re doing and that I think are going to have real impact,” she said. “But if you don’t see that, it doesn’t matter, to put it bluntly.”

Authenticity is important when it comes to pursuing sustainability goals, Quinn agreed. He said companies that see sustainability as something to embrace because it’s fashionable are making a big mistake.

“People who know you can immediately feel that it’s just not authentic,” Quinn said. “It’s better to be of your own independent perspective, striving to get somewhere even if it’s imperfect, rather than being an earnest hypocrite in the process.”