As more companies and consumers become privy to meeting climate-related standards, the insurance industry can become an important catalyst in achieving these goals. McKinsey recently spoke with Eleonora Sharef, a partner in the New York office, about how insurers have taken advantage of the opportunities presented in the climate space and how insurers can help clients advance their own environmental, social, and governance (ESG) efforts.
McKinsey: What climate and social efforts have you seen recently in insurance?
Eleonora Sharef: Transitioning to a climate-conscious economy is one of the largest priorities of the century. People don’t yet understand the outsize role insurance will play in this effort, however. Insurance is fundamentally about risk transfer—and the climate transition is all about risk, risk mitigation, and risk transfer. I see the insurance industry playing a role on three fronts.
First, insurance companies will be key in building resilience. Communities across the world use insurance products to protect themselves against catastrophes. Insurers can help protect customers against natural hazards by preparing them early and enhancing their product offerings based on climate trends. Insurers can also use claims to educate their clients on how to build resilience against climate catastrophes and support a greater use of preventive measures.
Second, insurance companies can help scale up the climate economy. Currently, one of the greatest challenges in scaling wind, solar, hydrogen, carbon capture, and nuclear fusion is insurance: because there is a lack of understanding around the underlying risks in these new technologies, many investors struggle to make sought-after investments in energy-transition companies. The insurance sector should rethink its approach to risk appetite and develop the right mechanisms to support these new sectors—but that’s no small feat.
And third, insurers are among the largest asset managers in the world. Their approach to investing will be increasingly important in furthering the energy transition. For example, many asset managers are continuing investments in tar, sand, and coal. But exiting these investment classes is complicated because several states in the United States have threatened boycotting financial institutions that ban investments in fossil fuels. As such, insurance companies will have to find a middle ground between these opposing sides.
McKinsey: What are the challenges of making climate-conscious changes like these?
Eleonora Sharef: The opportunity in the climate space is large, but it is a complex, nuanced space. Insurers should be careful when it comes to balancing both sides of the spectrum. For example, they may think that limiting their support of fossil fuels and coal companies is the right move, but that could lead to major backlash from stakeholders on the other side, which could hurt business. Sociopolitical conflicts around the world and the oil and gas shortage have also complicated ESG efforts, but companies are finding ways to thrive and prosper.
McKinsey: How are insurers innovating in the near term?
Eleonora Sharef: There are a lot of commercial opportunities emerging: insuring renewables, developing new parametric products to protect businesses threatened by physical hazards, or creating new insurance products that help offtake risk. Different insurers are innovating to meet the world’s needs, which is exciting.
Eleonora Sharef is a partner in McKinsey’s New York office.