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Carbon Risk Rating - greater transparency on the path to net zero

The journey to a successful transition into a low-carbon economy will require global collaboration on a scale never seen before. 

“Through the programme we were able to meet senior stakeholders who were extremely supportive of green innovation. We also learned how to design our offering in a way that makes sense to Lloyd’s members”
CarbonChain

Alongside the commitments that many nations around the world are making, Lloyd’s and the global (re)insurance industry have a unique role to play, providing innovative products and services to manage and protect against a rapidly changing risk landscape. This includes using market expertise to help pioneer new risk transfer solutions for green innovation and the Lloyd’s Lab has taken a significant role in leading the market to find ways to innovate in this area.

CarbonChain is one of a group of new start-ups that have been sponsored through the Lloyd’s Lab as part of ambitious plans for insurers to understand, measure and support the transition to low-carbon transport, mining and industry.

The scale and pace of green innovation required means that many firms are under pressure to demonstrate they have sustainable business operations. Critical business partners, such as banks and insurers, are now being asked to know the carbon footprints of the businesses they insure and finance.

The founders of CarbonChain had backgrounds in mining and oil & gas. They knew that all those involved in these industries were reaching for ways to measure carbon outputs, as well as track change and improvement, and they also knew that they could deliver these measurements.

CarbonChain was set up to focus on the industrial and commodities sector (oil, gas, metals mining, agriculture, transport). Those sectors account for over half of the world’s greenhouse gas emissions.  Working with commodities traders, producers, and banks that finance commodities products, the team built out a database of emissions information on specific commodity supply chains, plus globally significant, mines, smelters, refineries, cargo vessels and so on. As the database of emissions grew, CarbonChain began to understand their data could be valuable to insurers who wished to run climate stress tests on potential clients before insuring them.

The team at CarbonChain readily admit they: “Knew nothing about the insurance market… but on the other hand, we already work with a number of banks and large corporates, and were able to bring those lessons to conversations with the insurance industry and in turn help them to understand what best practice looks like elsewhere.”

The original CarbonChain proposal was to build a new database for maritime and marine underwriters, to allow them to understand the emissions of vessels they are insuring, and this was the first pilot project in the Lab, designed in partnership with Atrium, a longstanding insurer in the Lloyd’s market, who see a carbon emissions ratings database being an integral part of the marine industry’s decarbonisation efforts.

However, as the team developed the product, they began to see how their technology might work across wider underwriting portfolios for larger industrial conglomerates, and they undertook a second pilot project with Tokio Marine Kiln (TMK).

TMK and CarbonChain began exploring the idea of measuring emissions across whole insurance portfolios for large clients and, following a successful trial using a small data set during the Lab programme, have now jointly launched a live project looking at a portfolio of approximately 2,000 companies.

TMK and CarbonChain have a methodology framework to measure customers’ emissions and compare them with their industry and regional peers, translating this into a ‘carbon risk rating’ that TMK can take into account when considering each policy it is underwriting.

CarbonChain’s work is only just beginning. In future project phases, customers will be made aware of their ratings based on reported data or industry benchmarks. Customers who are not already measuring and reporting emissions data will be encouraged to do this to further improve transparency and begin to reduce their emissions scores.

In the longer term, TMK and CarbonChain’s project will also consider the plans that customers develop to reduce their emissions over time (in line with national, global, and industry targets) as well as the total amount of reduction in emissions achieved.

Lloyd’s itself has supported the wider roll-out of the initiative, with John Neal, CEO of Lloyd’s, adding: “This initiative is in line with our own ESG strategy and the guidance we have provided to the market to support them in their transition to a sustainable future.”

TMK’s CEO Brad Irick also announced a widening of participation, he said: “Our next step will be to ensure wider engagement and participation across the market.”

“The benefits of this technology extend beyond TMK and present an opportunity for the whole market and society more generally”
Brad Irick, CEO, TMK