Three ESG focus areas for the renewables sector

Three ESG focus areas for the renewables sector

The renewable energy sector continues to undergo rapid transformation as it plays a pivotal role in achieving global net-zero goals and energy security. This acceleration in the industry underscores the need for strong ESG principles in securing the capital investment and workforce resilience required for commercial success.

In this article we explore why a credible and consistent focus on ESG is essential to deliver on risk and human capital management strategies and highlight three key areas we consider critical to the sector’s success.

(E) Environmental: Managing exposure to climate change and natural catastrophe risks

Renewables play a central role in addressing climate change by reducing reliance on fossil fuels. But climate change itself presents significant risks to renewable energy providers, particularly for infrastructure such as solar and wind farms. 2023 saw $380 billion in economic losses from all global natural disasters, with only $118 billion of that amount insured. This highlights a significant global protection gap and a major financial risk.

As extreme weather events become more frequent and severe, insurers are increasing their focus on natural catastrophe exposure and location risk. They are looking to help clients help protect their assets and operations while at the same time adapting to an increase in the volume of claims coming from the flood, fire and wind damage extreme weather can cause. We find that clients are expected to take on more risk and provide detailed underwriting information if they are to be successful in securing cover. This introduces two key solutions that could support organisations in arranging insurance that is priced and structured to align with a more accurate view of climate-related risks.

Exploring climate modelling and analytics for pricing risk

Drawing on a wide range of data sources will help insurers and businesses develop an informed and customised view of risk. Unlike traditional catastrophe models, which often use historical data to look at near-term risk, climate risk models are designed to be forward looking and measure the probability of rare weather events that would result in major disruption and losses.

As climate models can vary in both the data they use and their assumptions, it’s important to look at multiple data sets and models. Risks will also depend on specific locations. For example, hazard data can be applied to specific locations where renewable energy organisations have assets and distribution networks, allowing them to better understand their risks, today and into the future.

How parametric insurance fills the gap for natural catastrophe cover

As the frequency of natural catastrophes rises, renewable energy operators are being challenged to find insurance to help protect against a whole range of economic losses from network and supply disruption, as well as physical damage to assets. The traditional property insurance market does not provide these protections and can also fall short on the liquidity that is so critical during a crisis.

This is why risk managers are turning to parametric insurance to better match their capital to the broad nature of risk caused by natural disasters. As a complementary and innovative solution, parametric insurance offers coverage triggered by an independent event, as determined by neutral third-party data providers to simplify the underwriting process. If this event occurs, the insured unlocks a highly flexible source of risk capital. Broad coverage – may help compensate for impacts such as loss of employee earnings and local economic impact – and fast payout may help clients continue and restore operations more quickly after an event.

Climate modelling is vital for renewable energy providers to better assess the probability of ‘grey swan’ events such as earthquakes, named windstorms, hailstorms, tornadoes and wildfires to help them determine if parametric insurance is a worthwhile risk investment. Data and analytics from climate modelling can also communicate to insurers, investors and other stakeholders that companies are taking a responsible approach to safeguarding business continuity and a sustainable supply of renewable energy.

(S) Social: Addressing the green skills shortage

As a sector, renewable energy faces a significant talent challenge. Forecasts to 2030 suggest the sector will generate 10.3 million net new jobs globally by 2030² to keep pace with growth. This green skills gap is especially acute in solar, wind and biofuels technologies – key pillars of the energy transition.³

According to an Aon survey of HR leaders in the industry, 64.7% organisations are looking to upskill and reskill their existing workforce as their primary solution. In a survey of recruiters and companies in the industry, Aon found that loss of expertise due to an aging workforce (14.9%) was a significant issue for skills shortages in the renewable energy sector and inadequate success planning for knowledge/skills transfer is the second highest cause of skills shortage (24.3%).

As the sector vies for the next generation of workers, it must lead in diversity, equity, and inclusion (DEI). By embedding a robust social strategy within their ESG commitments—centred on pay equity, meaningful work, and inclusive practices—these organisations can attract the talent necessary to drive the energy transition and secure long-term success.

(G) Governance: Strengthening cyber resilience

As the global volume and complexity of renewable energy infrastructure grows, so does the attack surface for cyber threats. At the same time, geopolitical, technological and human factors are driving a rise in cyber attacks across the whole energy sector. The International Energy Agency (IEA) reports that cyber attacks on utilities have been growing rapidly since 2018, reaching alarmingly high levels in 2022 following Russia’s invasion of Ukraine. Three key challenges heighten vulnerability to cyber-attacks in the renewables sector:

• Ageing assets: Early renewable installations, particularly wind farms from the 2000s, are reaching retirement age with outdated cyber protections. Extended lifespans without proper updates leave these assets increasingly exposed to cyber threats.
• Systems convergence: The merging of IT and operational technology (OT) systems introduces new risks. While automation and digitisation streamline operations, they also create larger, more complex networks that are susceptible to cyber attacks, particularly those targeting critical operational technology.
• Network exposure: Dependence on third-party assets and emerging technologies adds further points of vulnerability. As companies scale, the complexity of their operational networks increases, raising the potential for cyber threats.

Robust cybersecurity is crucial for the long-term resilience of renewable energy organisations and their vital role in the future of energy supply. In this context, strong governance within ESG frameworks is essential. Management and boards must prioritise cybersecurity, ensuring transparency and accountability in how risks are managed. Regular reporting on cybersecurity practices and incident responses also builds trust with investors and stakeholders, demonstrating a commitment to robust governance and long-term resilience in the face of escalating cyber threats.

The value in communicating clearly on ESG

As growth in the sector accelerates, renewable energy leaders are tasked with aligning human capital and risk strategies to address these complex challenges and emerging opportunities. Navigating this pathway to growth and success requires support from stakeholders including investors, employees, government, regulators and communities.

A credible ESG narrative is a vital part of stakeholder engagement and hinges on clear and consistent communication. As the industry moves forward, those organisations with robust ESG narratives will be better positioned to thrive as the sector continues to evolve.

At Aon, we use global expertise and world-class data and analytics capability to diagnose and address your specific ESG risks and opportunities. To find out more about the tools and capabilities that Aon’s renewables team has in place to help advance your ESG strategy, download our Renewables Capability Statement here.

If you’d like to speak a specialist in the team, please contact Pat Behan, National Renewable Energy Leader at pat.behan@aon.com

References 
[1] Aon Insights ‘Driving a Future-Proof, Skills Based Approach for the Renewable Energy Sector’ 21 June 2024
[2] World Economic Forum, ‘How many jobs could the clean energy transition create’, 25 March 2022
[3] BCG, ‘Will a green skills gap of 7 million workers put climate goals at risk?’ 14 September 2023