The role of insurance in climate innovation

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Natalia Moudrak: I don’t know if it’s cited to death, the statistic, but World Economic Forum estimates that there’s forty four trillion dollars US of economic value that is moderately or highly dependent on nature and ecosystem services.

Dominique Barker: We are glad to welcome Natalia Moudrak, Managing Director and Climate Resiliency Leader at Aon’s Public Sector Partnership. I’ll be referring to it as PSP. Aon’s PSP focuses on developing solutions to help governments and other public institutions reduce volatility and increase the resiliency of their mission through tailored solutions. On today’s episode, we will be focusing on the role insurance can play in the fight against climate change by scaling those investments into innovative decarbonization technologies. Aon recently published a paper and you can find that paper on Aon’s Public Sector Partnership website, and it’s also in our last CIBC Sustainability newsletter, so feel free to take a look at the link there. We’re pleased to welcome her to today’s episode of The Sustainability Agenda. Natalia, how are you doing this morning?

Natalia Moudrak: Good afternoon. Dominique, it’s a pleasure to be here. Thanks so much for hosting.

Dominique Barker: So let’s just kick things off. Why don’t you start by telling us about your role at Aon? It’s quite unique,

Natalia Moudrak: Of course, and as you know, Aon is a global professional services firm. I’ll give a bit of background to our listeners. We have fifty thousand colleagues working in over one hundred and twenty countries around the world, and we focus on providing clients with solutions around four key priorities, some of which you mentioned navigating new forms of volatility, rethinking access to capital, building resilient workforce and addressing the underserved. As you said, I work on a team called Public Sector Partnership Team, PSP. And we focus on delivering these solutions, specifically tailoring them to public sector clients. Now, in my role as the Climate Resiliency Leader, I work with colleagues and clients around the world to advance climate resilience and disaster risk reduction best practices, as well as drive new solutions that support the transition to a lower carbon economy.

Dominique Barker: Ok, thank you for that. So in that last paper that we referred to, you discuss insurance on technology and specifically climate. Could you describe it to our listeners and give us some insights on the solutions that are featured and specifically IP backed lending or intellectual property backed lending?

Natalia Moudrak: So the paper was written coming out of COP26 discussions that were held in Glasgow last November, The United Nations Climate Summit. And one of the key things that transpired at COP26 was this unprecedented engagement of financial sector to address climate change issues. There were over four hundred and fifty firms that committed to be part of the Glasgow Financial Alliance for net-zero, G Funds, and through this alliance, banks, insurers, investors committed around one hundred and thirty trillion dollars of financial assets to net-zero transition by 2050 across lending and investment portfolios. Now it’s great news, however, it’s the timely deployment of this capital that is essential. Think about all the capital that has to flow to infrastructure upgrades, renewable energy generation, transmission distribution and storage projects, EV technologies, methane and carbon emissions monitoring, capture and storage technologies, and so on. So the question we asked as we were writing this paper on the backs of COP26 was how do we play a role in accelerating the deployment of capital that was committed? And we know that critical to this is managing, protecting, valuing intellectual property. And by that, we mean patents, copyrights, trademarks, designer trade secrets and so on. And we utilize proprietary technology and we work with our IP valuation and investment experts to help companies understand the value of their IP and where there is interest in fit. We work with lenders to provide IP backed or non-dilutive or less dilutive debt capital for growth. So the example that I shared in the paper that was a one hundred and twenty five million dollar loan that we helped secure for Indigo AG, which is a high growth agricultural technology business in the US. Indigo AG needed to fund a key phase of their corporate journey. They were IP rich and had limited physical assets in which to secure traditional debt. Indigo wanted to avoid dilution from third party equity investment, and they were prepared to offer up their IP as a collateral for the loan. So our team reviewed their IP portfolio. We identified a range of values from going concern to liquidation basis to enable the lender to then assess the value of IP offered as a collateral for the loan, then we structured an insurance solution to protect the lender with respect to that IP being used as collateral and agree to support the lender by performing IP monitoring services that are periodic. And the outcome was that Indigo had access to less dilutive debt funding that it sought. And for the lender, it was the IP portfolio valuation, IP protection and that ongoing monitoring support. Now I reflect on the trillions of dollars that were committed to be deployed at COP26 towards that transition, right? And the insight into this value of IP for clean tech and protecting IP. I think it will be critical for landers, for investors, but for companies themselves. And as we think about climate tech or clean tech companies that are poised for rapid growth, having that access to non-dilutive capital should be an interesting proposition. And that’s what we highlighted in the paper.

Dominique Barker: That’s fantastic. That is such an interesting concept in such an important role to play in solving the climate crisis. So the article discusses technology performance insurance. Could you just expand on what that is and how it can help in decarbonization efforts?

Natalia Moudrak: Sure. So we spoke about G-FENCE, and when we look at the road map for net zero, there are four investment archetypes that they’ve mapped out, which include, one, early stage technology bets, two, maturing technologies in the emerging regions, three, market creation opportunities for mature technologies and, four, established technologies with attractive investment profiles. Now for technologies that are generally mature. We are exploring how insurance can help create more favourable conditions, so that investment into scaling of these technologies could be increased. As you mentioned, technology performance insurance can be a tool in the toolbox to accomplish this, and it works in such a way that it can help mature technology secure financing by ensuring if we’re using an example of renewable energy company, a shortfall in production of renewable energy caused by technology underperformance, for example. And this, in turn, can help protect the cash flows of a project and debt payments to the lenders, increasing their appetite to support such technology projects. Now it’s early stages, but what we are doing is working with insurance, reinsurance carriers to establish which carriers are comfortable with various technologies on the market, determine how much capacity exists today to support risk transfer and where the appetite for technology performance insurance solution lies on the market.

Dominique Barker: Hmm. Ok, thank you. So, OK, opinion time on the podcast. Natalia, in your opinion, our governments or the public sector moving quickly enough to develop and deploy green infrastructure and green technologies to meet our global net zero targets.

Natalia Moudrak: You know, I’ll be sneaky here, and what I will do is leverage messaging from scientific community to address your question.

Dominique Barker: Well, yeah, that’s probably appropriate. Science is king. Go ahead.

Natalia Moudrak: I think it’s clear we do not have the luxury of time, and we have to take immediate action to reduce greenhouse gas emissions. Simply put, otherwise, we will not meet the Paris accord targets. They will be beyond reach. And currently we have a gap between emissions globally that we contribute to atmosphere and what they should be. If we would like to limit global warming either to one point five degrees Celsius or two degrees Celsius from pre-industrial levels, I was reading this report published recently. It was from United Nations Environmental Program called Heat Is On. It notes that within the next decade, by 2030, the world will run out of the carbon budget to keep us on track with the Paris Agreement targets. And right now, this report incorporates recent commitments made by countries leading up to COP26. We are estimated to reach fifty five gigatons of carbon dioxide equivalent by 2030, whereas we need to be at thirty nine gigatons to be on track to limit global warming to two degrees Celsius world or twenty five gigatons to achieve the 1.5 degree target. So, you know, 2030 is just around the corner. I think the answer is that we need to move quicker. Another report I was reading from the International Energy Agency estimates that most of reductions in carbon emissions will come from technologies that are already on the market today. This is to meet 2030 targets, but come 2050, almost half of carbon emission reductions will have to come from technologies that either don’t exist yet or currently in this demonstration prototype phases, so we will see major innovation efforts that will have to be put into place to bring these technologies to market in time. And the question is, how do we combine public and private capital with insurance solutions to unlock innovation and drive investment into scaling these solutions?

Dominique Barker: Mm hmm. Mm hmm. And just for our audience, I just really want to continue to educate our audience on the amount of gigatons that we currently produce. So when Natalia talked about we need to get down to thirty nine gigatons in order to achieve the only plus two degrees or to twenty five gigatons to achieve only one point five degrees warming. You’ll remember that today our emissions are at about 50 billion tons or 50 gigatons. They’re actually fifty two. But I like to keep it around just to make sure everyone to keep it as simple as possible for our audience. So Natalia, why is Aon doing this? Could you speak to your own or Aon’s own climate ambitions and initiatives, please?

Natalia Moudrak: Oh, sounds good. So overall, in the realm of sustainability, we strive to be a powerful force for positive change, helping create more sustainable future either for our employees, families of employees, communities, clients we work with, but specific to climate. Internally, we committed to achieving net zero emissions by 2030, and this is in alignment with science based targets initiative. We are actively involved in driving climate agenda and insurance industry, so we are a member, founding member and the chair of Climate Wise Initiative. I’m not sure if folks know what climate wise initiative is. It’s a voluntary global membership initiative which brings together reinsurers, insurers, industry practitioners and they all working together to respond well to challenges and opportunities presented by climate change. There’s also another initiative that we are part of called Sustainable Markets Initiative. That initiative was launched in 2020 at the World Economic Forum. And the goal of SMI or Sustainable Markets Initiative is to establish a coalition of the willing who share the vision around the need to accelerate sustainable futures in the world. And so, as part of SMI, Aon is co-leading a work stream that is devoted to developing disaster resilience framework for climate vulnerable countries. And that work includes seeking solutions that blend public and private investment with insurance solution to improve disaster resilience for those countries who are the most at risk from climate related extreme weather events and disasters. Other initiatives that come to mind we were executive sponsor and signatory to the UNPFI and I think we were the first broker who joined the United Nations Principles for Sustainable Insurance. I mean, this is not an exhaustive list. You know that we are involved in forums such as Insurance Development Forum Task Force for Scaling Voluntary Carbon Markets, Task Force of Nature Related Financial Disclosures, the TNFD Forum, and actively seeking to collaborate with others who would like to make a difference in this space. But I think the biggest impact is actually working with clients globally to leverage data and analytics, risk advisory, risk transfer solutions and help navigate this climate volatility and mobilize capital towards low carbon transition and some of the ways that we discussed just earlier.

Dominique Barker: Ok, that’s an impressive list of work. I want to end with an area that I know is an area of passion for you, and I would actually go as far as to say that you’re one of Canada’s leaders in natural capital. So let’s end with talking about natural capital. Could you discuss the role that insurance could have to protect natural capital and explain the importance of protecting natural assets and how insurance can help?

Natalia Moudrak: Sounds good, and I actually think the first time we had a conversation it was on this topic. That’s how it started. Well, so I don’t know if it’s cited to death, the statistic, but World Economic Forum estimates that there’s forty four trillion dollars US of economic value that is moderately or highly dependent on nature and ecosystem services. But natural assets right now face an incredible number of threats. For example, in Ontario, where we are recording this, we lost already approximately seventy two percent of wetlands that used to be here to urbanization, land development, etc. and these wetlands provided valuable services in addition to habitat protection. They provided flood attenuation benefits, water quality improvements to downstream communities and so on. I think the good news is that there is growing recognition of the value that natural assets provide. We are seeing public and private sector actors committed to assessing that economic dollars and cents value of natural assets and incorporating it into land use planning and asset management decisions. And there is an increased interest, obviously, in conserving or restoring natural assets for carbon sequestration benefits they offer as well, especially as voluntary carbon markets are focused on nature based solutions. But climate change really increases the vulnerability of natural assets to hurricanes, to wildfires, droughts, other extreme weather events. So in this context, I think insurance industry could be seen as a valuable partner to help assess these risks and provide capital to aid with restoration efforts. If these assets are damaged or destroyed during wildfire or other extreme weather event, similarly, experience that could be helpful is assessing environmental risks that natural assets face. For example, pest infestations in Canada pine beetle so as communities embark on exploring solutions from insurance industry in the space. I think it’s important to note that yes, money alone cannot and will not replace lost ecosystems, but certainly having access to this capital to restore ecosystems would be important.

Dominique Barker: That is terrific. Natalia, thank you so much for joining us today. And importantly, thank you for your leadership in all things related to climate. I know you’re passionate about the area. You work extra hard and extra-long hours and you’re very passionate about the area. So we really appreciate all the work that you do and that Aon does in the area. Thank you for joining us today.

Natalia Moudrak: Likewise, thank you so much for hosting and I really do look forward to more conversations with you, Dominique.

Dominique Barker: Thanks.

Dominique Barker: Please join us next time as we tackle some of sustainability’s biggest questions providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is The Sustainability Agenda.

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