Why Insurers Care About Your ESG Story

Tuesday, July 21, 2020

MARSH

Introduction

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MIKE KOLODNER

Renewable Energy

Practice Leader

Marsh US

EDWARD NICHOLSON

Structured Credit Practice

Leader & Managing Director

Marsh UK

JOANNE SILBERBERG

Renewable Energy Practice

Leader

Marsh Canada

VALENTINA

KRETZSCHMAR

Vice President

Global Industry and

Corporate Analysis

Wood Mackenzie

JONNY SULTOON

Head of Markets &

Transitions

Energy Transition

Practice

Wood Mackenzie

CHRIS HAIREL

Vice President

Americas Consulting

Wood Mackenzie

Today’s Speakers

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woodmac.comTrusted Intelligence

Evolving Risks Resulting From Climate Change and the Energy Transition

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woodmac.comP O W E R & R E N E W A B L E S R E S E A R C H

How Wood Mackenzie Assesses The Energy TransitionOur energy capabilities are built on depth that forms an integrated view of various energy transition scenarios all

across each segment, commodity, technology and market

Investible Market

Intelligence

Industry Value

Chain Depth:

Assets,

Technologies,

and Costs

Energy Transition Research(Global Energy and Emerging Technologies)

Regional Power & Renewables Markets

Solar

Integrated Global

Perspectives

WindGrid

Edge

Energy

StorageOil & Gas

Metals &

Mining

Oils &

Refining

Regional

Gas

Markets

Metals

Markets

Global

LNG & Gas

Chemicals

Chemicals

Markets

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Electric

Vehicles

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0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Mt

CO

2-e

2019 ETO 2019 AET 2019 AET-2 IEA SDS 2019

Post COVID-19: Urgency Will Be High To Address Climate Change

Policy, technology and investment need vast ‘scaling up’ to meet the challenge of climate change. What

pathway will we be on in a post-pandemic world?

Source: Wood Mackenzie Energy Transition Service *emissions from energy sector

Global carbon emissions* history and forecast by scenario

Direction of Energy

Transition under

each WM scenario

Closing this gap presents huge,

unprecedented challenges to

investors, governments,

and consumers

3oC

2.5oC

2oC

2020: 5-15%

base year

reduction due to

Covid-19

Energy Transition Service

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0%

25%

50%

75%

100%

Actual (2018) WM ETO (2040) WM AET (2040) WM AET-2 (2040)

Coal Oil Gas Other Nuclear Hydro Renewables

Hydrocarbons Persist As The Largest Part Of The Energy Supply Mix

In rapidly accelerating transition scenarios, there is still a role for hydrocarbons, albeit diminished

Source: Wood Mackenzie Energy Transition Service

85%(Energy)

70%(Energy)

60%(Energy)

80%(Energy)

Total primary energy demand by fuel mix

Energy Transition Service

63%

(power)

50%

(power)

30%

(power)

25%

(power)

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ETO (3 ˚C pathway)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Mt

CO

2-e

Pre-COVID-19: Emissions Reductions Can Accelerate But Will Require Faster Technology Adoption And Firm PoliciesDifficult-to-abate sectors will continue to be challenged after Covid-19

Energy Transition Service

Source: Wood Mackenzie

Industry other includes cement, heat, petchems, smelting, textiles, other manufacturing and processing. RCA: residential, commercial and agriculture

AET (2.5 ˚C pathway)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Mt

CO

2-e

AET-2 (2 ˚C pathway)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Mt

CO

2-e

Steel Refining Industry other Power RCA Transport ETO emissions total

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Only 6% Of Global Carbon Emissions Are Covered Under A Regime With Pricing Above $40/Mt CO2EThe EU ETS accounts for 27% of carbon emissions under a carbon-pricing regime

Source: Wood Mackenzie

Pricing and emissions landscape

Current implemented carbon-price regimes by emissions coverage (MtCO2E) and price ($/MtCO2E)

$2 $3 $4 $5 $6 $8 $11 $16 $17

$24 $26 $33

$50 $59

$127

$-

$20

$40

$60

$80

$100

$120

$140

10 510 1010 1510 2010 2510 3010 3510 4010 4510 5010 5510 6010 6510 7010 7510

$/M

t C

O2

Poland Ukraine Chongqing Shenzhen Fujian Tianjin Estonia

Japan Guangdong Mexico Singapore Hubei Shanghai RGGI

Latvia Colombia Chile Tokyo Argentina South Africa Beijing

Portugal Prince Edward Island Canada Federal fuel charge New Foundland and Labrador Northwest Territories California Quebec

Spain New Zealand Slovenia Ireland Alberta UK Carbon Price Floor EU ETS

Denmark British Columbia Iceland South Korea France Norway Finland

Liechtenstein Switzerland Sweden

Emissions Mt CO2E

Global price on carbon required to meet Wood Mackenzie’s 2°C scenario (AET-2)

9woodmac.comTrusted Intelligence

Dr. Valentina Kretzschmar, Vice President - Corporate Analysis

O&G Strategic Response To Climate Pressures

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XOM: Report on 2

degree analysis &

strategy (WITHRAWN)Suncor: disclose

preparations for a

low-carbon future

(PASSED)

XOM: Publish an

assessment of

portfolio risks under a

2 degree scenario

(PASSED)

Occidental: Assess

portfolio for 2 degree

scenario risks

(PASSED)

Anadarko: Report on 2

degree analysis &

strategy (PASSED)

Shell: Take leadership

in Energy Transition

(REJECTED)

Set targets in step with

society’s drive to meet

the goals of the Paris

Agreement (PASSED)

XOM, Chevron, Equinor,

BP, Shell: Improve

disclosure / set targets

to reduce Scope 3

emissions in line with

Paris Agreement

(REJECTED /

WITHRAWN)

BP: improve disclosure

around strategy and

investment consistent

with the goals of the

Paris Agreement

(PASSED)

Santos and Woodside: shareholders

vote against the Board recommendation

on adopting Scope 3 targets. (NOT

BINDING)

Ovinitiv: shareholders vote against the

Board recommendation (PASSED)

SET SCOPE 3 TARGETS:

Chevron and XOM: blocked by SEC

Total, Equinor, Shell: at AGM. Shell’s Board

advised against it. Total to decide if it will be put

at AGM.

BP: withdrawn. BP agreed to draft a resolution

with follow this to be voted on next year.

Shell, BP, Equinor: Assess

portfolio for climate risks

(PASSED)

20192015 2016 2017 2018 2020

Investor Pressure Ramps Up, As ESG Scrutiny IncreasesPressure from activist and institutional investors is increasing. EU taxonomy and other

sustainable finance legislation provide framework for green investments. US embracing

change: SEC to create a firmer standard for reporting ESG metrics.

Source: Wood Mackenzie

Investor pressure

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Decarbonisation Is Quickly Becoming A Key Strategic Priority For The O&G Sector

Source: Wood Mackenzie. The Carbon Neutrality axis indicates an extent of carbon commitments. The New Energy Diversification axis indicates

how much companies have invested in clean energy diversification to date.

HighNew Energy DiversificationLow

Carb

on

Neu

trality

S

co

pe 1

Sco

pe 3

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M&A spend on clean energy companies

‘New Energies’ Make Up A Small Share Of The Majors’ M&A Spend, So Far

But O&G companies are beginning to build sizeable portfolios of assets

Source: Wood Mackenzie, Companies

Renewable power capacity under ownership and

in development, oil and gas companies

0%

2%

4%

6%

8%

10%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2016 2017 2018 2019 2020*C

lean e

nerg

y M

&A

as s

hare

of

upstr

eam

M&

A

US

$ m

illio

n

Chevron Eni Equinor BP Shell Total Clean energy M&A share of upstream M&A

Announced developments only. Does not include Shell’s NortH2 offshore wind/hydrogen project

9,090

6,595

5,321

3,654

2,900 2,771

1,042

42 -0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

MW

Biomass Geothermal Hydro Offshore wind

Onshore wind Solar PV Undefined

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0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Pre

-FID

@ U

S$60/b

bl

Pre

-FID

@ U

S$35/b

bl

Dow

nstr

eam

/chem

s

Renew

able

s(M

erc

ha

nt)

Renew

able

s(P

PA

)

IRR

(%

)

Note: For renewable energy projects we show equity IRRs; for oil and gas projects, we show project IRRs, assuming they are 100% equity financed.

Renewable Power IRRs Look Relatively More Attractive In The Current Low Oil Price EnvironmentMerchant renewable projects – though riskier – offer potentially higher IRRs than PPAs

Source: Wood Mackenzie

Typical energy project IRRs

At $35/bbl we see a

significant erosion in pre-

FID project economics

compared to US$60/bbl

Returns can be boosted

through project financing,

asset rotation and

securing O&M service

contracts

Merchant projects are

riskier but potentially

higher return. Sustained

low power prices will

erode returns

Power Purchase

Agreement (PPA) backed

projects offer low risk and

stable cash flow

Some project finance

may be available, but

COVID-19 will reduce

lender risk appetite

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Source: Wood Mackenzie.

Strategic Response Of The O&G Sector To The Energy Transition Most companies do not have competencies and capabilities required to follow the

Majors into diversification

• Move portfolio to the lower

end of the cost curve

• Investment / cost discipline

• Active portfolio

management

• Reorganisation of business units

• Digitalisation

• Business innovation across

different business segments

• Net zero carbon strategy

• CCSU, reforestation

• Carbon offsetting

• Strategic diversification into

renewables

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How Banks Are Assessing Carbon Intensity and Climate Risk in Lending Decisions

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending DecisionsCredit Specialties Perspective on Banks

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In the boardroom Behind the scenes

Bank agrees to provide corporate

client with financing.

Bank syndication market & other non bank Fis.

Marsh Credit Specialties & the insurance market.

Any ‘surplus’ is distributed.

A portion of the resulting credit risk is

held by the bank.

This then contributes to the bank’s portfolio (sector, geography,

etc.).

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending DecisionsOrigins of Bank Behavior

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Aim to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind.

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending DecisionsOverlap Between Environment & Climate Change + The ‘S’ & The ‘G’

UN SDGs

Sustainability

Environment

Non-carbon concerns

Climate change

Climate risk

Social Governance

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The G20 sponsored Financial Stability Board established a Taskforce on Climate-related Financial Disclosure (TCFD) in 2015. [MMCs’ Mercer a member].

The TCFD recommendations urge banks to use scenario analysis to assess and disclose the “actual and potential impacts” of climate-related risks and opportunities on their business as well as how they manage them. In this framework, climate risk can be divided into two risk categories: physical risk and transition risk. MMC’s Oliver Wyman & Mercer appointed 2018 by the UN to pilot TCFD recommendations with 16 leading international banks (see ‘Extending our Horizons’ paper).

E.g. sustainable use & protection of water, marine resources; transition to a circular economy; pollution prevention & control; protection & restoration of biodiversity & ecosystems.

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending DecisionsAll About The E?

EnvironmentalSocial &

Governance

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending Decisions One More Crucial Ingredient: The Bank’s Regulator

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UN SDGs

Sustainability

Environment

Non-carbon inputs

Climate change

Climate risk

Social Governance

Global aspiration

National regulator

Your bank’s regulatory

starting point.

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending Decisions Climate Risk Scenarios Meet Credit Risk Models

• ‘Other ESG’ considerations are assimilated

with a bank’s normal credit process with

relative ease.

• Climate is the big & dominant challenge

from a methodological point of view.

• However, do not overlook the other ESG

considerations.

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Climatic scenarios

Other ESG

Normal credit

process

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending Decisions Survival Or Something A Little More Comfortable?

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How Banks Are Assessing Carbon Intensity & Climate Risk in Lending Decisions Conclusions

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Banks face significant challenges. Substantive input on sustainability from corporates is a critical component if banks are to be successful in reinventing their offering.

Corporates have a strong vested interest in being be able to present their position on sustainability. The more granular the better.

Constant evolution of climate risk & individual bank portfolio characteristics + regulatory differences mean that there is no definitive position ‘today’, nor will there be one in the near term future.

Engage openly & corporates have a chance to shape their own future.

MMC is uniquely positioned across its operating companies to enable our clients achieve your goals.

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How Are Risk Managers Responding?

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How Are Risk Managers Responding?How to Communicate Your ESG Approach to Insurers

Take a proactive approach to providing relevant ESG information as part of your

underwriting submission, market presentations, and engagement with insurers.

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Do not ignore the Social and Governance factors. Highlight positives such as increased indigenous employment, commitment to health and safety, and more.

Demonstrate a commitment to reducing your own greenhouse gas emissions as well as those in your supply chain.

Highlight diversification of your business model or planned measures that demonstrate a commitment to transitioning to a low carbon economy.

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How Are Risk Managers Responding?Questions to Consider When Crafting Your Messaging

Environmental Social Governance

• What commitment have you

made to reducing the carbon

footprint of your operations

and your products in line

with the Paris Agreement1?

• What commitment have you

made toward reducing the

carbon footprint of your

customers and suppliers?

• What assessments of

climate transition and

physical risk have you

conducted on your

business?

• Do you ensure there are no

human rights violations in

your business operations?

• How do you monitor health

and safety of employees,

customers, contractors,

suppliers, and the general

public?

• What is your process for

community and other

stakeholder engagement?

• How is your governance

structure set up to ensure no

corruption, bribery, or

unethical work practices?

• What portion of your board

are independent directors or

women/minorities?

• Are board members trained

on climate and other ESG

related issues?

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Questions?

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