Going green carries its own environmental risks

Both insurers and corporations need to carefully appraise how various types of commercial activities could harm the environment. 

In the push towards net zero and a sustainable future for our planet, it is easy to overlook the fact that the switch to a greener society poses its own environmental risks. 

Invariably, many of the potential losses attached to these risks are not covered by the standard property and liability policies that many organisations rely on to safeguard their operations.

Risks to renewable energy projects

The transition to a low-carbon economy requires significant changes to energy production infrastructure in the Asia Pacific. Offshore wind for instance has seen strong growth in recent years. 

Momentum in offshore wind has picked up in the region with many countries ramping up investment in offshore wind power due to its high economic efficiency. 

The construction of new wind farms comes with significant challenges. Environmental exposures range from fuel spills to the impact of cabling on marine life and ecosystems. Above the water, wind turbines can negatively affect wildlife such as migratory birds. Similarly, solar farm construction carries many of the same environmental risks as those attached to onshore wind farms.

Whilst the net environmental impact of renewable energy projects remains considerably less than fossil fuel projects, renewable energy production is a risky business, whether in the initial construction phase or during subsequent operation. Many of these risks are environmental in nature and a significant proportion of the potential losses are not covered by standard property and liability policies.

Exposures to environmental losses 

Regulations around environmental liability have become more stringent.  The ‘polluter pays’ principle is often enacted by regulatory authorities to ensure that those who cause pollution bear the costs of cleanup, regardless of fault.

The availability of specialist environmental insurance cover has increased significantly, to fill gaps in cover under traditional policies. Property and general liability policies will not respond to many environmental losses, leaving policyholders to foot hefty bills in the absence of bespoke environmental insurance cover. 

Rising exposure to environmental loss

In assessing claims for environmental losses, loss adjusters rely on a thorough understanding of local environmental laws and regulatory requirements as well as on an understanding of the elements involved in an environmental claim, which concern what is described as the source-pathway-receptor linkage.

For instance, wind farms may use diesel generators for backup power.  An environmental pollution incident occurs if the fuel for the generators escapes and causes harm to the environment. In such an incident the source is the diesel fuel, the pathway is the route taken by the fuel to cause harm and the receptor is the entity affected by the pollution.

The pathway may be by land, water or through the air (as would be the case were harmful fumes to be emitted). The receptors may be humans, flora or fauna, for example, workers attending the farm site, plants, trees and other vegetation, mammals, reptiles or fish and other invertebrates, on or within the land, water or environment that becomes contaminated.

The management of the claim involves the containment of the source contaminants, the cutting off of the pathways for contamination and remediation/ clean up of the contaminated receptors. The costs involved in such management works may be significant, and they may be covered by environmental insurance.

We have worked with numerous environmental-related claims and we are seeing more of such cases where environmental exposures are leaving organisations with potentially costly liabilities. 

A green and clean future

As environmental legislation continues to become more stringent, organisations of all types need to be mindful of how their actions could impact the environment. 

From our work in this area, we see the importance for insurers and corporations to appraise the environmental risks associated with various commercial activities so that they can undertake effective management steps should environmental remediation be required. This requires navigating regulatory requirements, assessing contamination levels, implementing cleanup technologies, and ensuring compliance with environmental laws to mitigate financial and reputational risks for all parties involved.

Having environmental insurance cover is a key part of a risk management programme.