ESG and the Future of Energy

By | September 6, 2021

One area receiving increased scrutiny by underwriters are ESG related issues, or environmental, societal and government requirements, according to Ricky Bryan, executive vice president, IMA Financial Group Inc., and director of IMA’s energy practice in Houston.

“We’ve seen some interesting discussion with the renewable side in the ESG push around tax treatment for carbon capture and sequestration,” he said. There are some interesting products coming out as well. “I don’t know if they’re new or just revamped, but it’s an area that a lot of people are looking at on the executive risk side of the house, or the transactional side, where you can actually insure lost tax credits if all of a sudden you have an issue with the carbon sequestration operations.”

In addition to new products, the potential for increasing renewable energy demand and oil and gas companies’ plans to increase participation in the electricity value chain are giving rise to new business models. Just about every energy company today is looking to play in the renewable market, according to Bryan.

“Everybody is building a solar plant or a wind farm or a landfill gas,” he said. Landfill gas to energy systems divert landfill gas through extraction wells and pipe it to a landfill-gas-to-energy plant, where it is cleaned before specialized engines convert it to energy for use by a facility or even a nearby community. Energy producers are doing whatever they can to help their carbon footprint, Bryan said.

Bryan says that normally there are a few specialty markets willing to write such projects, but he believes as energy firms continue to expand their renewable energy silos, and more data becomes available to manage risk, the industry will see some of the traditional insurance markets pick up the emerging renewable energy side of the business. “Then all of a sudden, we’ll start having it absorbed into energy packages, just like we saw with terrorism,” he said.

While other segments of the energy market, such as oil and gas, experienced more extreme highs and lows in demand during the pandemic, the renewable energy space remained unchanged, according to Lance Gibbins, chair of Occam Underwriting based in London. Occam specializes in insuring complex risks, including space, clean energy, trade credit, political risk, surety and terrorism reinsurance.

“The class was largely unaffected by COVID 19,” Gibbins told Insurance Journal. Even as the market experienced lengthy extensions to construction periods due to delay, and some effect on supply chain, there were no real adverse effects from the pandemic, he said.

“If anything, it has done the opposite; there is now more opportunity than ever before within the class and we expect this to continue,” Gibbins added. “All [renewable] technologies are seeing significant growth as project owners look to capitalize on varying green credits, driven by local governments’ legislation to reduce carbon emissions by specific legally binding dates,” he said.

Wind and solar are the two most established forms of technology that continue to dominate the investment landscape. “However, as the price per Mw (megawatt) continues to fall in offshore wind and particularly as floating rather than fixed foundation solutions mature, we expect to see substantial growth in this area,” according to Gibbins.

Pandemic aside, Gibbins said he has seen an interesting shift from large traditional energy carriers as they look towards long term growth available within the renewable market. They realize, he says, that traditional oil and gas will not be here forever. “This shift in appetite has also been a result of the change in investment strategy by their oil and gas clients now looking more than ever at developing renewable energy projects.” Underwriters are at an interesting moment where experienced oil and gas developers look to utilize offshore experience and channel it towards offshore wind, he added.

Insurers too are getting a push to accelerate their business partnerships with renewable energy or clean energy clientele.

Insure our Future, an anti-fossil-fuel campaign group, has been pressuring Lloyd’s to stop insuring coal and new oil and gas projects that may exacerbate climate change.

In December 2020, Lloyd’s published an Environmental, Social and Governance (ESG) report — its first — in which it committed to ask Lloyd’s managing agents to phase out new insurance cover for thermal coal-fired power plants, thermal coal mines, oil sands or new Arctic energy exploration activities by Jan. 1, 2022. However, the target date for phasing out the renewal of such existing insurance coverage for coal and oil sands facilities and activities is Jan. 1, 2030.

Mike Hogue, managing director of the energy practice at Gallagher and co-author of the report, Global Energy Insurance Market Update published in August, says Lloyd’s is not alone in its pursuit to insure energy businesses with a better carbon footprint.

“We’re seeing other insurers in the U.S., not just Lloyd’s, that say, ‘Well, if you’re balancing your portfolio with other things like renewables, if you’re decreasing reliance on fossil fuels but you’re increasing reliance on renewables, we’ll still underwrite you.’ Even though you have coal and fossil fuel generation, you’re balancing it with renewables.'”

Five of the world’s six largest reinsurers — Swiss Re, Munich Re, Hannover Re, SCOR and Lloyd’s of London — have already scaled back bespoke coverage for coal projects.

Loren Henry, a commercial broker at Amwins Group in San Diego, California, is focused on insuring the renewable energy segment. He sees the growth trends in the renewable energy and green energy space continuing.

“It’s just going to continue to grow,” Henry said. “Whether it’s this year or four or five years from now, it’s going to grow. And with all these companies pushing to have less carbon emissions, the need is there, the demand is there … and I’m just hoping to be a part of the ride.”


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Insurance Journal Magazine September 6, 2021
September 6, 2021
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