ESG: what challenges and opportunities lie in 'E' for 'environmental'?
When the Fukushima nuclear disaster happened in 2011, it proved a vital catalyst for the energy transition in Germany. In the immediate aftermath of the event, the country decided to transition away from nuclear energy. Then, in 2020, the German federal government also announced its intention to phase out coal. The challenge now, therefore, is to find suitable alternatives to replace these major energy sources in the medium term. In June 2020, to help meet this challenge, the federal German cabinet launched its National Hydrogen Strategy to promote the use of hydrogen technology, in a bid to substantially reduce the CO2 footprint of the industry, transport and energy sectors.
The investment required to overhaul Germany's energy generation infrastructure as part of the country's energy transition is substantial. New renewable energy-generation facilities, including offshore and onshore wind farms and PV installations, will have to be built. There also needs to be rapid, large-scale investment in the expansion of the country's storage capacity and grid.
Renewable energy is not constant: whenever the sun's not out or the wind dies down, less electricity is produced. Storage systems are, therefore, needed to guarantee a continuous supply of wind and solar energy. This need to massively expand Germany's storage capacity and build high-performance power distribution networks capable of bringing the offshore electricity generated in the very north to the industrial centres in the south is one of the big sticking points in the country's energy transition. Likewise, the transition from traditional coal-based industry to hydrogen will require investment on a scale not seen before.
Climate targets – and how we meet them – have become major topics in social and political debate. In light of this, many multinational insurance companies have developed their own ESG guidelines, including defining how they can support the transition away from coal. Some companies, for example, have stopped providing insurance for coal-fired power stations with immediate effect – although it's worth noting that energy suppliers (who often use a mix of coal, other fossil fuels and renewables for their electricity production) will continue to need insurance protection until the energy transition is complete.
Moreover, the energy sector is just the start: the transport sector, construction and industry as a whole all need to be transformed as part of a future hydrogen economy. If this transition is to succeed, we must keep developing and improving the available technology. Many of the technical processes, including for hydrogen production and electricity generation, need to be substantially upscaled if Germany is to achieve its goals. And this very need to upscale and develop new technologies presents real challenges for both industry and the insurance sector.
Insurers will need to conduct comprehensive risk assessments, for example, to ensure they can differentiate between new technologies (prototypes) and further iterations of existing technologies. The results of these assessments are vital in determining the level of cover provided and available capacity – not just for the planning and construction phases, but also once these technologies are operational.
Understanding the different technologies, plants and projects and ensuring adequate risk transfer is a growing challenge for all stakeholders – insurers, brokers and customers alike.
In addition, the insurance sector (like the rest of the economy) is facing increasing staff shortages. In specialist fields such as engineering insurance in particular, these shortages are causing fundamental problems – including delays in underwriting and renewals. The need for meticulous project management and risk assessment work when insuring companies with complex risks in particular has also increased substantially and continues to do so. This situation looks set to crystallise in 2023, with all market players able to see clearly which (specialist) areas have enough technical and subject-matter expertise and underwriting capacity, and where there are already bottlenecks.
Managing Director Engineering