Leading Sustainable Organizations
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As the financial and personal impacts from climate change grow, the financial and insurance industries have been taking note. For some companies, that means advocating strategies to help business and society build their capacity to adapt to the effects — and reduce the causes — of climate change.
Swiss Re identified climate change as an emerging risk more than 20 years ago, long before most financial and insurance companies — or most businesses in general. A vocal advocate of mitigation strategies, climate change is now a significant component of the company’s long-term risk management strategy.
Partly because of that, they top the list of the world’s most sustainable companies in the industry, according to RobecoSAM, one of the world’s leading corporate sustainability benchmarks — ahead of more than 120 competitors in the Dow Jones Sustainability Indexes review.
A leader in the economics of climate change adaptation, Swiss Re has engaged in public-private partnerships to research and foster dialogue that can help shape the global climate agenda. MIT Sloan Management Review’s Nina Kruschwitz spoke with David Bresch, head of sustainability at Swiss Re, about his company’s efforts to address the complex problem of climate change risk.
Swiss Re has been leading the industry for many years now in terms of sustainability, climate change, and risk. What accounts for that?
Sustainability is about having a long-term perspective. The essence of reinsuring is taking a long-term perspective on business, and helping our clients to exercise this long-term perspective. It’s part of our mission in enabling sustainable progress.
As a company, we are also fortunate in that about half of our employees have at least a master’s degree in a wide variety of disciplines, from anthropology to philosophy to natural science and psychology — and some business background, too. You find that diversity at all levels of the company and especially at the top ranks. The current CEO is a mathematician; the current chief underwriting officer a physicist.
That diversity is a real strength. Top management here would never shy away from a complex issue such as climate change and say “Make it simple” or “I won’t believe in it until it’s exemplified.” We have always had an ability to conduct a central dialogue in risk that helps us take the time we need to talk about and think through very complex matters.
Was taking on climate change a deliberate decision?
I would say it was a very conscious decision to focus on climate change. Biodiversity loss may be even a bigger risk to the planet, but it’s not as closely linked to our business. We wouldn’t say it’s less relevant, but since we have less of a role to play there, we focus on climate change.
Our climate change efforts started long before I came into this role. You always build on your predecessors, and when I took over this function, our environmental management was already up to high standards. I did not have to spend a lot of time on base management. We are sourcing 100% renewable, we’re carbon neutral, we reduced our footprint by more than 50% since 2003 — there’s very solid success there.
That’s why I said, “Let’s take it further so we can really make a difference in our core business.” But even there, a story existed beforehand. I just made it more specific in the area of climate adaptation.
What about mitigation?
Since we’re not even close to hitting the CO₂ emission targets we needed to, we will have to adapt to a changing environment. You basically have to balance your mitigation and adaptation strategies, but the mitigation side is almost a thing of the past for us. We were very vocal at times when, I would say, a major part of our industry didn’t have a big interest in climate change. They didn’t see it as relevant enough. We were of the distinct opinion that it matters a lot in the long run, and the sooner you start tackling it the cheaper it becomes.
But cheaper does not mean for free. We have studied the economics of adaptation because we realized, otherwise, how can you allocate resources? And often it’s cheaper to adapt than to sit and wait for the loss, to learn it the hard way. Decision makers on local and higher levels can quickly understand that and start moving.
Of course, the problem is, therefore, people are tackling the consequences of climate change, not the cause. In climate change negotiations, we face a prisoner’s dilemma. Even if the European Union puts substantial emission reduction targets in place, the global climate problem is not going to go away unless others do as well.
It’s a frustrating situation for many here as well. But given the probable trajectory of climate change, is the insurance industry itself going to be able to stay in business?
We have very complex and sophisticated risk assessment models to deal with, for example, hurricane risks. And we diversify that risk across the globe. So we calibrate and adapt these models annually, because most of our contracts on the natural catastrophe side are renewed each year.
And we run studies to understand what the risk landscape might look like 20 years from now, by 2030. A lot of what is changing is economic development, which puts higher values at risk, especially in vulnerable regions. And climate change does start to play a role in that equation. Technically we are able to integrate that into our assessments, so we’re not too worried as we will still be able to put a price tag on risk. We might reach the limits of insurability because it might come at too high a cost, but the real point is that insurance is often an incentive to prevention and preparedness. And if people do that well, then insurability can be guaranteed.
How do you think about the concepts of resilience and risk management?
We have a deeper understanding of the concept of resilience. For a long time, risk management meant robustness. So if there was a flood risk, you built a dam. The higher the dam, the safer you were, until you realize if the dam is high, then people will build like crazy behind it, so they quickly make up for all the benefit of the dam by just taking on more risk with a false sense of security.
Now, instead of building a very high dam, you could build a dam of a certain height so that the loss from damage is not too frequent. Then you can consider things like wetlands behind or around the dam that can act as a buffer, or about building styles that can accommodate a certain level of impact. It’s a far more complex game because then there have to be conversations and decision about how high the dam should be, what’s the ecosystem service the wetland retaining some of the flood provides, what are the consequences of that, and is that really the best use of this land? Then there are questions about what the building codes need to look like in order to accommodate that, and so on.
That’s when it gets interesting. You have a really dynamic approach to a challenge. It involves far more stakeholders. They have to agree on a goal. They have to agree on shared responsibility. And these are all quite challenging things. That’s why we can only resolve or try to resolve those in a partnership approach.
Can you say more about that approach?
Insurance and reinsurance provide a service. We do not produce goods, so in that sense we don’t have direct control over most of the global initiatives to tackle problems at the root. The classical approach is the one in which you build an institution that has the mandate to operate or to resolve something within its realm. At a certain level of complexity that doesn’t work anymore. You have to convince [existing] institutions to collaborate.
We took a collaborative approach with like-minded institutions and formed the Economics of Climate Change Working Group. It’s a partnership between GEF, the Global Environmental Facility [a UN body], the European Commission, the Climate Works Foundation, the Rockefeller Foundation, and then like-minded companies like Standard Chartered Bank, McKinsey, and others to try to further this type of systemic understanding of resilience and climate change.
Basically we developed a methodology that helps decision makers in regional and national economies think about climate-related costs, investment options, and how the costs and benefits weigh out. It goes from prevention, to intervention, to risk transfer as instruments. But it really comes down to how a society allocates its resources. And in order to do so, a society needs to have a certain shared understanding about what it values.
That’s a tall order. How do you start that conversation?
We start by simply saying look, there’s a price tag on climate change. If you’re not tackling this problem at the root, which means reducing emissions, it will substantially impact the economy through the consequences, which grow in severity over time. It means we need to de-carbonize the economy. That’s obvious. It’s just a question of the cost of that transition — and who should bear it. These are not easy decisions, because it’s all about the future, it’s about changes in habit, changes in practice and changes in the built environment over time. There are a lot of variables.
A scenario approach can bring some light to that type of decision making by saying, “Hey, there are opportunities which will make you more resilient, and there are strategies you can use to shape your economic development over time. And the decisions you make that shape your risk landscape now will be what put you in a better or worse position 20 years from now.”
We elaborated on this methodology and charted out economic development pathways and possible climate impact scenarios to see how they interact and intersect. That helps us find ways for more resilient — not just robust — development in the sense that you’ve increased your adaptive capacities. You’re better able to cope with shocks from within your system and to your system.
What kinds of scenarios and choices are we talking about?
In the end it means something extremely specific. Take, for example, increasing climate resilience for the city of Hull, in the U.K. First we looked at the most relevant hazards and analyzed historic disaster data — wind, inland flood, storm surge, etc. Then we used probabilistic modeling to estimate the magnitude of expected economic loss. We estimated the expected economic loss today, the incremental increase from economic growth, and then any further incremental increase due to climate change. Climate change risk is the most difficult to predict, so we used three different scenarios: today’s climate, moderate climate change, and extreme climate change running out to 2030. In the case of Hull, using the high climate change scenario, the expected losses from exposure to climate increased 71%, to about 90 million U.S. dollars annually on average.
And then you give them options as to what they can do?
Indeed. For Hull, we built a portfolio of different adaptation options, everything from an education campaign, to reinforcing sea defenses, to retrofitting buildings and changing codes for new building. It turned out that about 65% of the predicted loss under the high climate change scenario could be cost-effectively averted by prevention and intervention measures.
We basically bring a level of transparency to decision making by putting a price tag on risk. And at the end we can be very specific, and say if you think about climate adaptation, these are the 150 different things you could do, these are the costs and benefits to each of them. And through that, we help to increase societal resilience. We’re not a provider of resiliency — we don’t run the education campaign. That’s not Swiss Re’s business — but we do provide insurance cover and ask for a premium to pay. And that means putting down the price tag that incentivizes preventive action, like the education awareness campaign.
What are some of the challenges to this approach?
In an ideal world there would be a decision maker or a leader or somebody whose mandate it was to manage risk in a region. Often this person doesn’t exist. That’s why we strongly advocate the role of a country risk officer, so a person would, in fact, be tasked with that.
For example, take any place on the coast in the U.S. Gulf region. Putting all your money into flood defense would probably mean you’d have nothing left to invest in your education system, or your health, or your pensions. Tough decisions need to be taken.
It would help a lot if you were to go to a specific coastal area, do some risk zoning, and say, “Since this place floods this often, we should only allow building of this quality.” And then you could say, if it is built up to this quality, and maintained to this quality then, for example, it’s eligible for insurance. Otherwise, it’s not insurable, because it will be damaged so heavily, so often, that it is economically not viable.
If those kinds of conversations and debates could happen openly in the planning stages, before any new development or re-development occurs, people could then have a forward-looking view of risk, and know how to develop an area with more resilience, if that’s what they decided to do. Decisions could be made with more transparency.
But the problem is, you can always bet that the risk will not hit you, or will not hit you in your term in office, or will not hit you during your lifetime or will not hit that particular place by pure luck.
Do you think it’s human nature to think more about opportunities and benefits then to focus on the risks?
In the end, I think most individual decisions are taken in a rational sense because somehow people do integrate all the issues. You can think that if you build your vacation home on a beach, it’s less of a problem if it occasionally gets washed away because you do not live permanently in your vacation home. You just have to make sure you’re not there when it gets washed away, so you just need to make good recreation plans. But if it were your only full-time home, you would probably figure out how to protect it better.
That’s a good metaphor. Collectively we only have one full-time home.
Yes, that’s true, though the metaphor was unintended.