Climate transition risks: Implications for Workers’ Compensation

As part of Australia’s commitment to the Paris Agreement, Australian Federal and state governments have set targets to reduce emissions to net zero by 2050, and approximately 50% by 2030.

These targets represent an economic transformation, posing risks for high-emitting sectors and potentially giving rise to significant economic shocks, as well as opportunities for traditional industries to adapt and new industries to emerge.

However, there is a common thread between the challenges and opportunities presented by this transition; change and disruption, a once-in-a-lifetime shift in the economy and workforce.

What could the transition mean for workforces, and how should Workers' Compensation schemes prepare?

Background to the transition

“The transition” refers to reconfiguring the economy to reduce emissions to limit global warming to well below 2°C, and to aim for 1.5°C, compared to pre-industrial levels.

State and Federal Government targets for emissions reductions and associated policies are key drivers of our transition.

For example, the Australian Government has:

• Set a target to reduce emissions by 43% below 2005 levels by 2030, and achieve net zero emissions by 2050
• Set a renewable energy target of 82% of electricity generated by 2030
• Revised the Safeguard Mechanism so that our highest greenhouse gas emitting facilities reduce their emissions in line with Australia’s emission reduction targets.

Further, incentives are in place from various governments to encourage the take-up of electric vehicles and renewable energy sources.

Transitioning the whole economy

The net-zero transition will impact the entire economy. Today, Australia’s economy and the workforce that powers it are highly dependent on sectors that have high emissions — and a good proportion of our GDP and employment rely on them — for example, coal mining alone contributed $90.75 billion [1] to the Australian economy and employed 42,500 people in 2023.

Similarly, rapid investment in, and development and uptake of new technologies will also be required to support the transition to net zero.

A defining feature of climate transition risk is that it has a geographical impact. There will be regions across Australia that will benefit from the transition and areas that will be at a disadvantage.

Mining-dependent regions such as La Trobe Valley in Victoria, or the Hunter Valley in NSW will be strongly impacted. Regions that provide goods and services for declining industries will also be affected.

These economic structural changes will impact the workforce, requiring reskilling and retraining for many workers. Some workers may need to relocate, and a challenge for governments will be in smoothly transitioning workers with homes and families in a region, and who may not want to leave.

The transition has already begun: a case study

Although Australia has a long way to go to reach net zero, the transition is underway.

Insights into how the transition may impact workers’ compensation can be drawn from the closure of Hazelwood Power Station in Victoria, which closed in 2017 (three years before the expected 2020 closure) with only five months’ notice.

Since Hazelwood's mine opened in the 50s, several generations of families have worked and lived in the local community. Hazelwood employed 1,000 workers, of which 800 were full-time. The average tenure of a typical worker was 25 years, and the average age of a worker was 52 years old.

Two years [2] after the closure, only around 1 in 3 workers had found full-time work and one in four were unemployed. This was despite substantial State and Commonwealth Government assistance, including the $20 million Worker Transfer Scheme [3], which sought to secure re-employment for 150 workers.

Impacts to Workers’ Compensation

At a high level there are four main impacts of climate transition to workers’ compensation schemes:

1. Different work (for example, fewer coal workers and more people employed to install and maintain renewable energy facilities) may change the profile of workers’ compensation claims.
2. Sunsetting industries, leading to challenges with return to work for injured employees and a possible spike in claims from workers who are close to retirement age. In some cases where a portfolio is concentrated, there may be a risk of being left with high-risk workers and/or employers with return-to-work challenges.
3. Risk that changes in the mix of occupations will expose cross-subsidies. For example, the risk that you don’t get enough low risk, or, overcharge if there is a big reduction in high-risk occupations.
4. The need to monitor and assess sectoral transition pathways as they impact premiums and claims generally

Reduced availability of reinsurance or financing also poses a challenge. Reinsurers or banks may adopt ESG strategies that reduce their appetite for reinsuring or financing industries that do not support the transition.

This is already happening in Europe with the coal industry where banks have withheld funding in line with climate pledges to restrict lending to the sector.

How can Workers’ Compensation schemes prepare?

What to do depends on who you are and what sort of industries and occupations you insure. Although in every case, you should start managing the transition early, to ensure an orderly and smooth transition for your business.

You can do this by monitoring government plans for transition, especially the net-zero economy authority that is orchestrating a smooth transition for highly impacted industries. This will be the earliest indicator of any changes or policies that will affect the workers you insure.

Ultimately, you must understand how types of work are changing for workers and the resulting new types of injuries that arise. Each underwriter of the risks for their particular portfolio should assess the transition risks and the potential claims profile under transition scenarios.

Risk models will need to be reassessed and recalibrated to incorporate the emerging risks. There are opportunities to gain a competitive advantage for those who can effectively manage and price the new risks.

Additionally, you should conduct an analysis of workforce shifts by state, age, industry and occupation:

• Look at industry and occupation data cross-sections. For example, an accountant may not initially be considered at risk from the climate transition, but an accountant working in the local mining town for a coal company may be.
• Use more granular data. Getting lower-level ANZSIC and ANZSCO codes to conduct analysis.
• Consider the age profile of workers. Return to work analysis will depend on whether workers are close to retirement or not.

[1] https://www.statista.com/statistics/874406/australia-gross-value-added-coal-mining-industry/

[2] https://www.parliament.vic.gov.au/49c31b/contentassets/bb36eec27c15447bbdefee0dec57d50f/lceic-59-08-closure-of-hazelwood-and-yallourn.pdf

[3] https://ccep.crawford.anu.edu.au/sites/default/files/publication/ccep_crawford_anu_edu_au/2020-11/ccep20-10_wiseman_workman_fastenrath_jotzo_after_hazelwood.pdf

This article first appeared on the Finity website and is reproduced here with permission.