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Energy transition will have transformative effect

Climate change and Environmental Social Governance (ESG) will transform the energy industry risk landscape, according to Willis Towers Watson at the launch of its annual Mining Risk Review.

This transformation is taking place against the backdrop of the impact of both the COVID-19 pandemic and a rapidly hardening global insurance marketplace.

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ESG forms the key theme of the report, highlighting that the transition to a low carbon economy requires a fundamental reappraisal of mining company climate risk; the Review shows that achieving a satisfactory ESG rating will be critical in enabling mining companies to attract and maintain the support of key stakeholders in the future.

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Other key highlights of the report from an insurance market perspective were:

Capacity: theoretical capacity levels remain broadly similar to last year, although line sizes continue to become increasingly restricted. While in previous years, Willis Towers Watson have reported major insurers withdrawing from coal mining risks, it seems that lobbyist pressure has now moved on to insurers’ involvement in other industries, with only one global insurer pulling out of coal this year.

Losses: It is still too early to provide full details of the significant impact that Covid-19 will have on the Liability and D&O sectors. However, following a series of disastrous losses in 2018 and 2019, the Property loss record for mining seems to be improving, unlike other sectors.

Rating levels: for Property business, rating increases are still modest in comparison to other heavy industries, but retention levels, terms & conditions and sub-limits are all now being significantly affected by the hardening process. However, for the Liability and D&O sectors, rating increases are now much more pronounced.

Underwriting data: the new levels of data required by insurers in terms of underwriting information are proving challenging to buyers; in particular, insurers’ scrutiny of their schedule of values and a growing tendency to impose price caps on both Property and Business Interruption amounts.

Graham Knight, Head of Global Natural Resources, Willis Towers Watson, said: “In these unprecedented times, the mining industry finds itself beset by challenges from all sides, as COVID-19 tightens its stranglehold on the global economy and insurance market conditions harden.

“However, it is the issue of climate risk and ESG that will have a more significant impact on the future shape of the industry. Mining companies must incorporate ESG, above all climate change into their risk mitigation strategies in order to survive in the future.”

Adding a South African perspective, Adrian Read, Practice Leader for Natural Resources, Willis Towers Watson South Africa, said:

“Mining companies in South Africa have a unique set of interacting priorities – on the one hand the global insurance market pressures and demands from international shareholders play a significant role.

“On the other hand, there needs to be the recognition that mining companies in South Africa play a key role in the energy and resources needs of the developing economy.

“As an example, in South Africa the move away from energy coal may need to proceed at a different pace than elsewhere. At Willis Towers Watson, we are helping mining companies to navigate this complex risk terrain and manage the transition.”