Energy sector must incorporate ESG standards, climate change into risk mitigation strategies, says Willis Towers Watson

ARLINGTON, VA, April 16, 2020 – Climate change and environmental, social and governance (ESG) will transform the energy industry risk landscape, according to Willis Towers Watson (NASDAQ: WLTW), a leading global advisory, broking and solutions company, at the launch of its annual Energy Market Review. Additionally, the recent oil price war and reduction in demand for hydrocarbons because of the current COVID-19 pandemic will have a significant impact on future energy industry risk management strategies.

ESG forms the key theme of the report, highlighting that the transition to a low-carbon economy requires a fundamental reappraisal of energy company climate risk. The review shows that achieving a satisfactory ESG rating will be critical in enabling energy companies to attract and maintain the support of key stakeholders in the future.

“In these unprecedented and uncertain times, there is no denying the past 12 months have been challenging ones for the energy industry,” said Graham Knight, head of Global Natural Resources, Willis Towers Watson. “Climate risk and wider ESG factors will have a significant impact on the future of the industry, and today’s energy businesses must commit to incorporating ESG standards and climate change into their risk mitigation strategies to ensure a sustainable future.”

Other key highlights of the report from an insurance market perspective include:

• Capacity: Once again the upstream market has bucked the general market trend, as theoretical amounts are now at another record level — $8.73 billion — up from $8.1 billion in 2019. The reverse is true, however, for downstream, where capacity has declined for the second successive year, down to $5.97 billion from last year’s $6.42 billion.
• Losses: The extraordinary run of benign loss years in upstream continues, with only three losses in excess of $100 million during 2019. Downstream also shows a significant number of losses over $100 million, with one major loss significantly above $1 billion.
• Rating levels: Rating increases are still very modest (2.5% to 5% on average) compared with downstream, which features increases well in excess of 20% for virtually every type of program, and significantly more for refinery and petrochemical business.
• Profitability: The upstream market remains profitable in overall terms; however, premium income levels are still low by historical standards, and certain subsectors of the upstream market, such as offshore construction, have been hit by attrition losses. The portfolios of downstream and liability insurers remain firmly in the red, and the long road back to profitability is uncertain.

“We cannot underestimate the immediate challenge faced in loss of demand as a result of COVID-19 and the impact of the recent oil price war, notwithstanding the agreement now reached by OPEC+ to cut production by 10% of global supply,” said Knight. “While it is still too early to forecast exactly how these factors will play out in the months ahead, the potential effects on the energy industry are obvious: reduced capital expenditure, a reduction of exploration and production activities, lower refining margins and lower business interruption valuations. It will also have a knock-on effect on premium income levels for an insurance market that remains unprofitable for most lines of business.”

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.