Expanding ESG and Climate Risk Modelling: Integrating Safe and Just Boundaries

As the (re)insurance industry continues to grapple with the complexities of ESG (Environmental, Social, and Governance) and climate risk, the challenges of building a more comprehensive risk framework remain.

Traditional metrics, while valuable, fall short in addressing the complexities of our global ecosystem and the intertwined human and environmental systems. While a previous article, "Planetary Boundaries: The Evolution of ESG and Climate Risk Modelling?", effectively highlights the significance of the Planetary Boundaries Framework (PBF), it omits several critical elements. This article aims to fill those gaps by integrating the Safe and just Earth system boundaries framework, to further enhance risk management modelling currently used by (re)insurance industry.

Incorporating Dual Limits: Safe and Just Boundaries

The concept of Safe and just Earth system boundaries, developed by the Earth Commission in collaboration with the Future Earth scientist network and the Global Commons Alliance, adds a crucial layer to the PBF. While the previous Planetary Boundaries article discusses the importance of the PBF in identifying critical ecological thresholds, it does not expand upon the safe limits for planetary stability and stricter limits that also protect human well-being.

Safe and Just Limits are defined as:

• Safe Limits: Protecting Earth’s systems to prevent ecological collapse.
• Safe and Just Limits: Stricter thresholds ensuring that human populations are not significantly harmed.

For instance, while the IPCC recommends limiting global warming to 1.5°C to avoid catastrophic climate impacts, the safe and just framework proposes an even stricter limit of 1.0°C to prevent harm to vulnerable populations already affected by climate change.

Recommendations for the (Re)Insurance Industry:

• Incorporate both safe and just limits into risk models to better assess and mitigate risks.
• Develop insurance products that incentivise clients to adopt practices aligned with the stricter safe and just limits, promoting broader sustainability.

Examples of how the Safe and Just limits can be applied are highlighted throughout this article.

Addressing Local and Global Pollution

The traditional approach to environmental regulation often targets direct causes of pollution, such as limiting fertiliser use per square kilometre. However, this does not address the root causes driven by global economic systems. ?The previous Planetary Boundaries article emphasises the interconnectedness of human activities and planetary systems but falls short in addressing the local impacts of pollution. The safe and just framework sets specific limits for key areas such as local air pollution, particularly aerosols, to protect human health, e.g.:

• Aerosols Global Safe Limit: 0.25 to 0.50 AOD (Aerosol Optical Depth).
• Aerosols Local Safe and Just Limit: 0.17 AOD, aligning with WHO standards to mitigate local health impacts.

These targets align with World Health Organisation standards.

Recommendations for the (Re)Insurance Industry:

• Incorporating these limits into ESG models can enhance risk assessments and guide mitigation strategies.
• Implement risk assessments that account for both global and local pollution levels.
• Offer insurance solutions that support pollution control measures, especially in regions with high local pollution.

Preserving Biosphere Integrity

The previous Planetary Boundaries article discusses the need for a broader perspective in risk assessments but does not provide specific recommendations for preserving ecosystems. To maintain the health of our biosphere, the safe and just framework suggests that 50-60% of the planet's land area should remain intact. Additionally, 20-25% of managed land within urban and rural areas should be reserved for nature. These measures support biodiversity, enhance local food production, and provide mental health benefits through green spaces. The integration of these boundaries into ESG assessments can help identify areas where intervention is needed to preserve ecosystem services and promote resilience. This approach highlights the importance of:

• Intact Ecosystems: Essential for biodiversity, local food production, and mental health benefits.
• Urban and Rural Nature Reserves: Critical for sustaining biodiversity and providing ecosystem services.

Recommendations for the (Re)Insurance Industry:

• Incorporate these boundaries into ESG models to enhance risk assessments and guide mitigation strategies.
• Evaluate clients' land use practices and encourage the preservation of natural habitats through tailored insurance products and pricing.
• Support and promote urban and rural development projects that integrate green spaces and nature reserves.?

Sustainable Management of Water Resources

A.?? Groundwater: Sustainable Extraction Rates

The safe and just framework emphasises that groundwater extraction should not exceed natural recharge rates to prevent long-term damage.? Over-extraction of groundwater can lead to several detrimental effects:

• Land Subsidence: Excessive groundwater extraction can cause the ground to sink, leading to structural damage to buildings and infrastructure. This subsidence is often irreversible and can increase flood risks in affected areas.
• Saltwater Intrusion: In coastal regions, over-extraction of groundwater can cause saltwater from the ocean to infiltrate freshwater aquifers. This contamination makes the water unsuitable for drinking and agriculture, further exacerbating water scarcity.

Recommendations for the (Re)Insurance Industry:

• Incorporate natural recharge rates into ESG models to enhance risk assessments and guide mitigation strategies.
• Incorporate groundwater extraction rates into risk models to identify areas at high risk of subsidence and saltwater intrusion.
• Encourage clients to adopt sustainable groundwater extraction practices, such as implementing aquifer recharge techniques and using water-saving technologies.
• Develop insurance products that incentivise the sustainable management of groundwater resources, including sustainable extraction practices and investment in technologies that reduce water usage.

B.??? Surface Water: Ensuring Sustainable Use

Surface water, including rivers, lakes, and reservoirs, is another critical resource for drinking, agriculture, and industry. Unsustainable use of surface water can lead to several issues:

• Agricultural Impact: Overuse of surface water for irrigation can deplete water levels, impacting local ecosystems and reducing the availability of water for other uses. This can lead to conflicts over water rights and affect food security.
• Drinking Water Supply: Unsustainable extraction of surface water can reduce the availability of clean drinking water, especially in regions already facing water scarcity. This can lead to public health crises and increase the cost of water supply.

Recommendations for the (Re)Insurance Industry:

• Support the monitoring of surface water usage and compliance with regulatory limits to prevent over-extraction. This can include satellite monitoring and real-time data collection.
• Promote water-efficient practices among clients, such as drip irrigation in agriculture, recycling of industrial water, and water-saving fixtures in buildings.
• Encourage the protection and restoration of natural ecosystems that support surface water availability, such as wetlands and forests. These ecosystems play a crucial role in maintaining water quality and regulating water flow.
• Develop insurance policies that reward clients for sustainable surface water management, including adoption of efficient irrigation techniques or the implementation of water recycling systems.

Embracing Social Justice

The previous Planetary Boundaries article acknowledges the importance of social and governance metrics but does not delve deeply into social justice issues. The safe and just framework highlights the need to address interspecies, intergenerational and intragenerational justice, ensuring that current and future generations are not disproportionately harmed by environmental degradation.? This approach also emphasises the value of integrating Indigenous knowledge honed over generations. Specifics include:

• Interspecies Justice: Humans have a moral obligation to protect and respect the rights of other species, ensuring that they are not disproportionately harmed by human activities. It advocates for fair treatment, conservation of biodiversity, and the maintenance of ecological integrity, recognising the intrinsic value of all living beings.
• Intergenerational Justice: Ensuring sustainable practices that do not deplete resources for future generations.
• Intragenerational Justice: Addressing inequities within current populations, particularly the disproportionate impact of environmental degradation on poorer communities.
• Indigenous Knowledge Sustainable Practices: Learning from Indigenous peoples who have successfully maintained biodiversity and managed resources sustainably.

Recommendations for the (Re)Insurance Industry:

• Integrate social justice considerations into ESG assessments and risk models.
• Support Indigenous and local community-led conservation projects through specific insurance products and partnerships.
• Create insurance products that specifically address the needs of vulnerable communities and support sustainable practices.

Advancing Sustainability through Comprehensive Risk Modelling Transformation

The integration of the Safe and just Earth system boundaries framework into ESG and climate risk modelling represents a significant advancement in addressing the complexities of global sustainability, ensuring that both planetary health and human well-being are addressed and safeguarded.?

The integration also offers the (re)insurance industry an opportunity to lead in proactive risk management and sustainability. This shift requires a commitment to systemic change to foster a more equitable and resilient future.?

By redefining risk assessments to include these comprehensive limits, (re)insurers and brokers can better understand the interconnectedness of environmental and social systems. This approach not only helps in identifying and mitigating risks but also supports clients in their transition towards sustainable practices and transforms challenges into opportunities for the (re)insurance industry and beyond.

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