Industry Views

Energy, Utilities and Natural Resources

Key Issues for the Industry Currently Reflected in the Risk Selection

Energy companies are grappling with ESG obligations, so it is unsurprising that environmental risk ranks at number five. Transitioning to carbon neutrality will alter their risk profiles, requiring them to simultaneously maintain their capital positions while addressing scrutiny from investors to meet their ESG obligations. Macroeconomic and regulatory trends are already affecting not only the availability of risk transfer for some industry sectors but also the profile of boardrooms — for example, through activist investors.

The Colonial Pipeline cyber attack demonstrated an increase in cyber risk, which has been exacerbated, at least in part, by increased remote-work arrangements during the COVID-19 pandemic. Energy companies should be assessing their IT environments to understand their ability to defend against attacks, but changes to their operating technology environments will expand this threat in the long term.

Talent management is becoming increasingly important. Energy companies need to retain and attract talent to support the sector’s transition to carbon neutrality, as well as to compete with other industries that prospective employees perceive as more advanced in their sustainability initiatives. This is developing into a key risk, and the energy industry has to adapt to mitigate and manage it. As the energy transition accelerates, the workforce of the past may not have the skills needed for the future, including expertise in new technologies such as hydrogen and carbon capture. Demand for engineers and skilled labor is likely to surge as more new, low-carbon projects come online in response to heightened concerns over climate change, governmental action and the global drive to net zero.

Surprises in the Top 10 Risks Selected

Given the increased influence of ESG across the entire energy and power sector, as well as growing pressure on company boards from shareholders, investors, governments, regulators and non-governmental organizations, it is surprising that this did not rank in the top five risks. Initially, industry ESG concerns focused on oil sands, thermal coal and arctic drilling. The entire industry is now under scrutiny due to its high carbon usage and faces mounting pressure to deliver a credible decarbonization plan underpinned by clear actions and targets.

Failure to attract and retain talent is another major risk that is not included in the top 10 risks, although it may be reflected in the high rank of accelerated rate of change in market factors. Many companies and observers across the sector acknowledge that a lack of talent is a significant and increasing risk to energy transition and growth plans and warrants elevated attention form senior management.

Additionally, the volatility of the business environment, which arises at least in part from political risks and growing stakeholder influence, is recognized as pivotal to the future of the industry, despite not rising to the top-ranked risks.

The top risks selected could suggest that the day-to-day roles of some respondents may at times distance them from the changing risk environment and the growing influence of external stakeholders on their boards. Companies that implement an ERM strategy are likely to have greater risk alignment between the board and the insurance buyer and thus can respond more effectively to current and future risks.

Most Underrated Risks

Climate change and reputation risks do not appear to be top of mind for energy respondents. However, as the world is becoming more aware of industries that could pose an existential threat to humanity, these risks could become relatively significant threats to the industry. The World Economic Forum’s “Road to net zero in four charts,” among other analyses, points to the impact of decarbonization initiatives in the developed and developing worlds on current oil and gas economics. Additionally, although weather and natural disasters did not make the top 10 risks list, they are more consequential than some higher-ranked risks considering recent extreme weather events globally.

Given the industry’s heavy reliance on governmental decision making, political risk should rank higher as regulators across the world grapple with the appropriateness of actions, subsidy protections and their impact on the energy transition. We see regional variations in terms of how the pace of change is being dictated, which has a knock-on effect for global energy companies.

Challenges the Industry Will Face in the Next 3 Years and What Organizations Can Do to Address Them

Utility companies will need to devise ways to shift power to consumers. This will include smart technologies to help control consumption and possibly to share non-fossil-fuel sources via a two-way grid. As reliance on fossil fuels diminishes, non-fossil energy sources — renewables and nuclear options such as thorium — will become important commodities. The energy sector faces game-changing trends and technologies over the next few years. With global warming and extreme climate conditions becoming the new normal, there is growing global recognition that changes are needed quickly.

Companies need to demonstrate well-developed ESG objectives because these will become important for continued access to capital, specifically when pursuing new investments. The industry has made some ESG progress on its own, but government action — for example, placing a price or tax on carbon — may accelerate change.

On the asset side of the balance sheet, safe and sustainable infrastructure transition, as well as the necessary decommissioning and repurposing of assets, will alter risk profiles, influence capital requirements and necessitate a review of risk retention and transfer mechanisms, as well as of insurance coverage and levels.

How New Challenges Will Require Companies to Change Their Approaches to Risk Management and Mitigation

Companies need to adopt a holistic risk management framework that includes physical and human assets. ESG and climate change realities will drive significant change in the way energy and power companies manage the risks of their assets.

Power sector insurance needs are increasing exponentially as companies work to eliminate fossil fuels from their energy mix and invest in new technology. Energy companies are used to managing high-profit projects and now are confronted with technologies such as hydrogen that could take many years to generate a return. Some integration of power and traditional oil and gas businesses is inevitable as the industry transitions toward carbon neutrality. This could take over 30 years, but energy companies need to adapt to a new reality to meet changing obligations.

ESG and the energy transition have created new and evolving risks that boards and companies need to navigate. With limited historical precedent to guide them, businesses must find new ways to define how they look at risk and return on capital, including issues such as decommissioning and the management of stranded assets and implications for production. The transition to new forms of energy and the convergence of power and energy sectors will potentially affect the speed of return on capital investment.

Current Top 10 Risks

Predicted Future Risks

By 2024

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