Planetary Boundaries: The Evolution of ESG and Climate Risk Modelling?

As ESG and climate risk continue to dominate discussions in the (re)insurance industry, it becomes evident that current practices are still challenging.

While the UN SDG and current ESG guidelines have made commendable strides and continue to evolve, they have distinct limitations when it comes to genuinely developing strategies in response to planetary impacts.? A critical question now looms for the (re)insurance industry and its clientele: are we merely ticking boxes to meet regulatory reporting requirements or actively seeking to remedy planetary risks?

Incorporating Comprehensive Metrics

While previous articles have touted the Keeling Curve, Science-Based and Context-Based Analysis, and Scenario Analysis as crucial tools to augment ESG/Climate data insights and support ESG/Climate underwriting, a broader perspective now beckons that can enhance risk knowledge and help define new products and services critical to supporting client transition: The incorporation of the Planetary Boundaries Framework.

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The Planetary Boundaries Framework

In 2009, Johan Rockstr?m, the former director of the Stockholm Resilience Centre, and a team of 28 eminent global scientists originally introduced the Planetary Boundaries Framework (PBF).? The PBF has undergone multiple updates since its inception and, in their most recent publication in Science Advances on 13 September 2023, the research team reported that “six of the nine boundaries are transgressed, suggesting that Earth is now well outside of the safe operating space for humanity” as noted in the image below. ?

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When modelling the impact of these boundary breaches, especially in the areas of climate and land system changes, the report clearly documents that the human-caused influences on the Earth's system are interconnected and need to be viewed as part of a larger whole to identify and execute holistic interventions.

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Why Does It Matter For ESG/Climate Modelling?

At a time of “ESG” pushback and lack of corporate leadership to challenge these pushbacks, there has been a growing argument to eliminate “ESG” and concentrate exclusively on CO? metrics.? But does focusing solely on CO? emissions capture the entire environmental impact narrative?

The PBF argues for a more comprehensive view, factoring in Earth's entire system. Consider scope 3 emissions, a substantial part of a company's carbon trail, often under-represented, leading to carbon neutrality claims that, in reality, might support fossil fuel consumption.

Beyond the environmental dimension, there is a danger in oversimplifying or neglecting metrics that gauge social and governance performances. If we accept that some of the most pressing global challenges stem from social inequities and governance failures, side-lining these indicators on the grounds of measurement complexity is both unwise and irresponsible.? As society places a growing importance on certain values, these values should be measured as they are effectively new “risks” for (re)insurance clients.

As noted in the Science Advances publication, “planetary boundaries bring a scientific understanding of anthropogenic global environmental impacts into a framework that calls for considering the state of Earth system as a whole”.? If the PBF is incorporated into an ESG risk assessment tool, it would greatly enhance any current ESG ratings sold by the various service providers and/or highlight where vendor ratings are incorrect (as highlighted in previous articles).? Further, if incorporated correctly, the PBF can be part of a valuable tool for the (re)insurance industry to not only better identify risk, but also aid client transition to protect, recover and rebuild Earth resilience.

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Planetary Boundaries and The Voluntary Carbon Market

Can the voluntary carbon market (VCM) leverage the Planetary Boundaries Framework? The Science Advances publication provides clues. By aligning carbon credits with the framework's benchmarks, guiding carbon offset project designs, and emphasising systemic solutions over isolated efforts, the VCM can harness this tool for more informed decisions. Practical implementation in carbon markets will require a change to methodologies and tools. Fortunately, VCM market leaders are constantly updating and evolving their insights and methodologies.

In the figure below, the Science Advances publication authors have created a simulation, highlighting the impact of the combined effect of land system change and climate change boundary states on trajectories of terrestrial carbon stocks and global land temperature.

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Using similar simulations in the VCM, the PBF, while conceptual, could reshape carbon market methodologies, tools and strategies, setting the tone for:

1. Benchmarks for Carbon Credits: The simulations reveal specific boundaries (e.g., atmospheric CO2 at 350, 450, and 550 ppm) and consequences of surpassing them. Carbon markets can use these as reference points when establishing carbon credit goals or pricing.
2. Informed Decision Making: Businesses and individuals buying carbon credits can use this information to understand the real-world implications of different levels of offset. For instance, the difference between stabilising CO2 at 350 ppm versus letting it rise to 550 ppm.
3. Holistic Carbon Projects: Carbon offset projects can be designed to address both climate and land system change.
4. Risk Communication: The findings offer a clear picture of the risk associated with different levels of boundary transgression. This can be a powerful tool in communicating the value and urgency of buying carbon offsets to potential buyers.
5. Long-Term Planning: The simulations look at impacts not just in the near future but up to 2770, emphasising the long-term effects of today's actions. This could encourage more long-term commitments in the voluntary carbon markets.
6. Carbon Sequestration: The study highlights the potential of forests to act as carbon sinks, implying the immense potential of reforestation and afforestation projects in the voluntary carbon markets.
7. Understanding Systemic Risks: The results show that it's not just about the amount of CO2 in the atmosphere, but also about other factors such as forest cover. This underscores the importance of systemic solutions rather than siloed efforts.
8. Refining Project Evaluation: Carbon offset projects can be evaluated based on how they align with the identified boundaries and zones of risk, ensuring that investments are directed to projects that offer the most systemic benefits.
9. Advocacy for Policy Change: Understanding these boundaries and the implications of transgressing them can inform advocacy efforts. VCMs can push for stricter regulations and policies in line with these findings.
10. Highlighting the Efficacy of Maintained Efforts: The note on maintaining human impacts at their 1988 levels underscores the importance of consistent efforts. It can serve as a compelling narrative on why sustained efforts in carbon offsetting and forest preservation are crucial.

For VCMs and (re)insurers seeking to support VCM buffer pools, the essence of this paradigm shift highlights the interconnectedness of various environmental efforts and embodies the future of proactive risk management.?

Challenges or Opportunities?

By adopting the PBF and integrating this framework into ESG/Climate risk assessment and transition tools, the (re)insurance industry could redefine the narrative - transforming not just a client′s risk assessment, but also their pace of transition and tangible impact on planetary wellbeing.

As we move forward, the integration of this framework could support the (re)insurance industry′s blueprint for a sustainable future, turning challenges into opportunities. The challenge for the industry? Turning this potential into reality. Will the (re)insurance industry rise to the occasion?? Watch this space.

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