Factoring climate change into commercial property

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Zurich surveys the future of climate risk and what it may mean for commercial property stakeholders as they build resilience amid changing social and regulatory pressures

THE CHANCES are high that emissions from the building you are sitting in right now are partly responsible for last year’s heavy rainfall and extreme storm activity that resulted in one of the costliest years ever for commercial property insurers in Australia. For Evan Moore, head of property, marine and technical lines at Zurich, the circularity is a reminder that doing something about climate change is at the crux of the insurance industry’s future. According to the World Economic Forum, buildings represent 39% of global greenhouse gas emissions, including 28% from operational emissions and 11% from building materials and construction. While these figures include private dwellings, the fact that over a quarter of global greenhouse gases come from ongoing operations suggests that commercial buildings and their complex infrastructure play an outsize role in unsustainable practices and related climate consequences. Going forward, there is little doubt that commercial property owners can expect tougher scrutiny of the size of their carbon footprint, from initial design through to consideration of what happens once the building is past its use-by date.

Zurich Financial Services Australia is the local arm of Zurich Insurance Group – a leading multi-line insurer that serves global and local markets. For 100 years, Zurich has combined global expertise with local care to provide leading wealth and insurance solutions. Zurich’s general insurance business is dedicated to a fully intermediated broker advice model. This approach is paired with a state and regional presence, empowering local teams to make local decisions on the ground. We are passionate about our purpose to ‘create a brighter future together’ and use our resources to contribute to communities through disaster resilience, community partnerships and sustainability.

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Losses from extreme weather events forecast to multiply

Average annual cost to households of extreme weather events in Australia

“Resilience to climate change needs to be high on the agenda”

Evan Moore, Zurich

“The carbon life cycle [related to commercial buildings] is an increasing concern – from the materials and insulation used during the construction phase to the operational energy and water use throughout the life cycle, and then finally the renovation and recycling of materials post economic use of the building,” Moore says. According to Moore, there is now a growing focus on climate change from commercial building stakeholders, regardless of which stage in the building life cycle they are at. “Resilience to climate change needs to be high on the agenda,” he says.

There are both short- and long-term factors to be considered when looking at how to reduce the environmental impact of a commercial building.

This is where environmental, social and governance initiatives are likely to play a role by helping owners quantify what aspects of a building’s operation and construction emissions they are responsible for. “Providing better end-to-end transparency on supply chain and the ESG impacts both up and downstream of the building [should be a priority],” says Moore.

The Zurich Tower in North Sydney is a case study in the use of sustainable building materials in construction, as well as enhanced air filtration and rooftop solar panels; and the energy and water efficiency it has achieved in its operations. The 29-storey building has been awarded a 5 Star ‘Green Star’ Rating by the Green Building Council of Australia.

Australia has committed to cutting net greenhouse emissions to 43% below 2005 levels by 2030, a target now enshrined in the federal government’s new Climate Change Act. There are also a range of sustainability goals being embedded throughout supply chains. “The expectation is that legislative change will continue to support sustainable objectives within the built environment, so property owners need to recognise that reinstatement may include significant improvements from existing building standards,” Moore says. In a recent survey of Australian business leaders, two thirds of respondents stated that their due diligence processes explicitly included ESG considerations, and more than 80% said they had conducted or planned to conduct an ESG review of their policies and operations.

increases of around 6–10% in general, there remains a need to close the gap as the market was slow to react initially to inflationary pressures,” Moore says. Add to this the increasing regulatory risk posed by ESG and climate initiatives, and there could be a further, largely unquantified gap between the building sum insured and the actual cost of fixing problems if something goes wrong. Eventually, the insurance market will begin to recalibrate on its own if underinsurance gets worse. “Funding for underinsurance will drive rate increases disproportionally across the market. Those with robust approaches to valuations and indexation are likely to see more appetite for insurers to take risks and [offer] favourable terms. Those who do not react may see the opposite effect,” Moore says. Zurich’s network of experienced property underwriters around the country work closely with brokers and customers to identify underinsurance and try to address any issues well before a claim arises.

Building resilience in

Other ways Zurich is aiding the transition

Published 11 Sept 2023

“The expectation is that legislative change will continue to support sustainable objectives within the built environment”

Evan Moore, Zurich

Flooding in 2022 (actual)

Extreme weather events in 2050 (estimated)

$0bn

$10bn

$20bn

$30bn

$40bn

$7.17bn*

$35.24bn

Source: Insurance Council of Australia; McKell Institute

*As of July 2023

Source: Herbert Smith Freehills business leader survey, August 2022

of business leaders say they have conducted or plan to conduct an ESG review of their policies and operations

ESG considerations front of mind

80%

Over the short term, buildings need to be made resilient to increasingly frequent extreme weather events in order to safeguard present-day users. But the short-term goal of surviving the next big storm is inextricably linked to the long-term goal of safeguarding future generations against even more severe climate change by ensuring that buildings are carbon-neutral from inception to demolition. “Resilience can require community engagement as well as capital expenditure,” Moore says. The physical components are also key. “Build quality is an important factor – both in avoiding unsustainable and less durable products but also in the intrinsic design of building for resilience in the future. This is a challenge that faces the individual property owner but should also be taken into consideration for master planning at town, city and state level.”

Growing regulatory focus

Given the forward momentum around more effective oversight of the climate risks facing commercial building owners, one area of concern is underinsurance. Underinsurance has long been a challenge for the insurance property market, exacerbated during the past 18 months by high inflation around construction costs. “Whilst the market is reacting to this with [sum insured]

General insurers in Australia like Zurich are already contributing to the transition to a low-carbon economy by factoring climate risk into their underwriting decisions and prioritising investment strategies that capitalise on a clean energy transition. The company’s Zurich Resilience Solutions (ZRS) unit also has a dedicated team of climate resilience experts who support organisations in tackling climate change risk and gaining a better understanding of how it might affect their operations, strategy and financial position.

Underinsurance exacerbated by both inflation and climate threat

For commercial buildings, the ZRS team can help with advice on both long-term and short-term goals – including the immediate need for improved resilience for the next natural catastrophe. “Risk assessment is key for property owners. They need to assess the longer-term climate resilience for major perils like floods and bushfires,” Moore says. “Our key focus remains on developing better resilience for customers, and our proactive ZRS solution can help to provide better insights at both a customer and property-portfolio level.”

For example, with the increasing use of solar panels, Zurich has been supporting its commercial real estate customers as they transition to installing them, by providing practical guidance on emerging risks. “It’s important that the installation of solar panels is in non-combustible areas, such as a concrete roof. Proper installation and continued maintenance is imperative. This includes electrical solar inverters, as these can equally be the source of ignition if poorly maintained,” Moore says. Another challenge in installing solar panels is their susceptibility to storm damage. “The development of hail-resistant solar panels is a welcome innovation in the marketplace, but it’s recognised that the technology is still in its infancy, and these risks continue to evolve.” When the next climate event arrives, Zurich will be ready to assist its commercial property customers. With its claims service record, Zurich has set the standard as winner of the Mansfield Award for Corporate Property and Casualty for the past three years. “Our claims team aims to get our customers back to business as soon as possible, with our Priority Settlement Service for small property claims and a specialised team for complex and major losses,” Moore says.

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