The Transition Economy High Res

SUSTAINABLE TRANSILIENCE AN EXECUTION GUIDE IN TIMES OF TRANSITION

Contents Page 3 Executive Summary Page 4 The Four Drivers of Change Page 7 Redefining the Transition Economy Page 8 Financial Services - ‘Bankrolling Extinction’? Page 9 What is Transition Risk? Page 10 Why worry about Transition Risk? Page 12 How Leaders Should Approach Transition Page 22 What should we look for when thinking about transition risk? Page 26 BigTech – friend or foe? Page 28 Suggested paths to deliver a successful transition Page 38 Implications on the insurer’s business model Page 40 Growth framework: de-risking insurance venturing Page 43 What’s next? Page 44 About Alchemy Crew 2

Executive Summary The transition economy. What is it? How did we get here? What are the implications for the future? If the global pandemic has taught us anything, it’s that we need to develop resilience and become more conscious of sustainability trends within our businesses and societies. The next two decades will see After all, the future of insurance and significant change, thanks to evolving finance is in your hands. This paper demographic trends, resource aims to start the conversation. But scarcity, climate change, and rapidly- where will it lead us? How best to adapting technology. respond? That’s still up for discussion. This discussion paper sets out to I hope you find the insights shared define the transition economy for the stimulating, challenging, re- 21st century. evaluating - maybe even a little Firstly, what it is. Secondly, what frightening. If this helps us develop a transition risks the insurance and path to designing more sustainable financial services industries will have businesses, products and services, I to grapple with as we seek to shape - will consider this initiative a success. and adapt to - this new normal. This paper assesses the significant Sabine VanderLinden drivers of change that have led to “Reinventing the industry I care for.” where we are now. It goes on to Co-founder, CEO & Managing Partner highlight the challenges facing the Alchemy Crew financial services industry. And it explores how we can respond to the new class of transition risks we see emerging daily. We designed this paper to be co- We should learn from this created with 60 senior leaders who crisis. Digital, resilience, and attended and engaged in a private trust are essential to building discussion session we hosted on a true sustainable world. March 4th. Now we want to open this conversation to the many. Please help us with your feedback and Jean-Pascal Tricoire insights regarding what matters most Chairman & Chief Executive Officer for you and your organization. Schneider Electric 3

The Four Drivers of Change The future of sustainability is not just down to changing lifestyles or changing values. Societal, technological, economic, environmental, and geopolitical drivers are all playing their part as well. As the world becomes increasingly interconnected and digitally-enabled, changes that occur in one region are more likely to have a ripple effect on others, as we recently experienced during the pandemic. In its 2018 paper on Drivers of Change (updated in January 2021), the European Environment Agency highlights six ‘clusters’ of change that drive sustainability challenges and opportunities in Europe and worldwide. We selected four of these as the focus of this paper: Growing urbanization and population migration Globally, growing populations are migrating to cities. They are also aging. Throw in the impact of the pandemic, and now we need a whole new set of assumptions when it comes to population projections and the design of cities. Many cities are adopting an innovative – or ‘smart’ – approach to technology to help support these patterns. Climate change and environmental degradation worldwide It’s not just greenhouse gas emissions that are having a negative impact on the environment. There’s also pollution, chemical production, poor air quality, microplastics in the food chain, and biodiversity loss. All of these are forcing corporations to act on climate change and support renewable energy initiatives. The increasing scarcity of – and global competition for – resources Fossil fuels continue to dominate the world’s energy supply chain. We continue to consume resources prodigiously. Our growing populations need more land on which to live and grow food. A growing middle class demands access to richer food, more energy, and luxury goods. All of this puts added strain on the world and threatens a greater scarcity of land and water. Accelerating technological change and convergence The 4th industrial revolution, the emergence of powerful tech companies, increased digitization, and accelerated technological change. On the plus side, these have created many sustainability-driven technologies. But they have also given rise to ethical, privacy, and security issues that we have never had to deal with before. 4

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Most businesses in the developed world are grappling with their operational, value chain, and talent challenges to address the sustainability imperative. Moreover, the continuous interactions among purpose, beliefs, values, and lifestyles bring additional layers of complexity and uncertainty when making business decisions. Today, it is far harder to evaluate technological innovations that can fulfill environmental, societal, and economic needs. Nonetheless, when done right, such choices can yield significant financial and strategic returns. 6

Redefining the Transition Economy The term ‘transition economy’ comes That is especially with a lot of historical baggage. Traditionally, the phrase refers to true for the moving from a centrally planned systems related economy (where resources are controlled centrally) to an open to the way we market economy (where price is influenced by supply and demand). produce and Today, ‘transition economy’ means consume food, more than that. We should think of energy, transport, it as an economy where businesses and industries that rely heavily on and construction.’ fossil fuels and older technologies are transitioning towards new In this paradigm, a transition means of production, consumption, economy is one in which and distribution. Adapting their governments, industries and operations, products and services, corporations pursue sustainable value chains, and business models development at scale through to support a new, more sustainable green technology and other means. economic vision. This involves Demand for lower carbon emissions incorporating new technologies and and environmentally friendly new ideas about innovation. solutions creates massive structural transformations and impacts private The systemic and public institutions. global Below, we lay out how environmental groundbreaking companies such as Caterpillar, Orsted, Schneider challenges ahead Electric, and others address their transition and its underlying emerging of us require our risks. These should bring some societies to change great insights into identifying ‘quick win’ strategies that the market - dramatically. consumers and corporations - will embrace. 7

Financial Services - ‘Bankrolling Extinction’? According to portfolio.earth our Of the ten banks abusive relationship with the environment contributes to an USD with the most $8 trillion hole in the global economy. significant It may also be directly responsible for rising unemployment and social exposure to inequality. At the same time, recent analysis suggests that Covid-19 has biodiversity risks, set the global sustainability agenda the top players are back 25 years in just 25 weeks. The latter makes the need to act more headquartered in urgent than ever. the USA, Japan and Whether you look at the 2021 Europe. Several Corporate Knights study of the world’s 100 most sustainable Chinese banks corporations or portfolio.earth’s Bankrolling Extinction report, the appear further financial sector remains at the back down on the list. of the pack when it comes to being accountable for sustainability. Another critical fact to note is what Indeed, in 2019 the world’s largest kinds of investments these banks banks invested more than USD $2.6 have made that contribute to trillion in sectors that governments biodiversity destruction. For example, and scientists agreed were primary 32% of all loans and underwriting drivers of biodiversity loss. That’s were associated with infrastructure, the equivalent of the annual GDP of 25% with metal and mineral mining, Brazil, or Canada, or Korea invested and a further 20% with fossil in activities related to fossil fuel fuels. And despite agriculture and extraction, deforestation, overfishing, fisheries constituting only 10% of all and ecosystem destruction. investments, the food production sector is considered to have a None of these banks had put proportionally higher negative impact any systems in place to monitor on global biodiversity. the specific impact of their loans on biodiversity. Governments To slow the emergence of new risks, even protected them from any financial institutions must work consequences. harder to minimize - even stop - their long-term funding of depleting Now governments are looking to projects. Admittedly this is not such hold banks and insurers liable for an easy request when 80% of the the damage they indirectly cause. world’s energy still comes from fossil Global investors - both retail and fuels. institutional - are also becoming more vocal about where their money goes. 8

What is Transition Risk? Naturally, a transition economy comes with transition risks. We can define a transition risk as a new vulnerability that organizations are exposed to when moving from one business model to another. The simplest example is an energy company moving from extracting fossil fuels to renewable sources of energy. Or take the example of a logistics company shifting its fleet from internal combustion engines to electric vehicles. Or even a textile manufacturer having to move from ‘fast’ fashion to ‘slow’ fashion to encourage more ethical and sustainable production methods. From an environmental perspective, the new fleet or more sustainable clothing production will be a vast improvement. Nevertheless, the For insurance and the broader switch gives rise to hazards related financial services sector, re-pricing to new infrastructure, new production carbon-intensive financial assets methods, and the general design and represents one significant transition reengineering of physical property. risk. How will these assets be re- In the process of priced? How fast will it happen? Could this lead to non-sustainable adjusting towards assets becoming impaired or a less polluting stranded? Think about energy companies and lower-carbon such as BP, Engie, Orsted, Shell, or economy, several Total. These businesses have had to devise strategies to shift fossil industries already fuel-based business models to new renewable energy-based models. face significant This shift requires one to think about shifts in asset business models in different ways. As old fossil fuel assets lose value values or higher over time, new renewable and digital assets gain value and re-establish or costs of doing strengthen energy companies’ market business. We can capitalizations. see the impact of this on their respective share prices. 9

Why Worry About Transition Risk? From the UK’s 10-point plan to boost the green economy to China’s plan to become carbon neutral by 2060, no matter where in the world you do business this transition will soon effect you. As we’ve seen, corporate leaders in the energy sector recognized the need to adapt a decade ago. Meanwhile, the pandemic has accelerated – even forced – digital transformation in many other industries, leading executives to take transition risks seriously for the first time. A major focus of our research is the interplay between broader economic transitions and the insurance sector. It has become clear that incumbents and tech-focused new entrants alike need better tools and techniques to understand transition risks. To propel the design of the right solutions or platforms, insurers should pay close attention to the firms beginning their transitions, and look to quantify best practices in the field as they emerge. 10

CASE STUDY Orsted Danish green In 2009, Orsted realized that fossil Orsted started to transition its fuels were not environmentally business model in 2012 in the energy firm Orsted sustainable or financially viable. The following ways: is a global leader company devised three critical goals 1. Moving from offshore drilling to in offshore wind. in its transition to green energy tech: offshore building of wind farms. To phase out coal by 2023, Orsted was a leader in North Sea Named the world’s second most generate nearly 100% green offshore drilling. The company sustainable company in the energy by 2025, and focus decided to build offshore wind Corporate Knights Global 100 Index entirely on renewables. farms and retain key staff. This in 2021, its mission is to create a world To become the global leader facilitated a radical shift to that runs entirely on green energy. in offshore wind and develop renewables. Ten years ago, Orsted was one of innovation and large-scale 2. Investing in high tech capabilities. the most fossil fuel-intensive energy deployment of onshore wind, Investment costs were so high companies in Europe. Since then, it solar energy, and storage that the Danish government has reduced its carbon emissions by solutions, delivering green energy provided Orsted with subsidies to 86% and aims to be carbon neutral to hundreds of millions of people facilitate its move to wind farms. by 2025. worldwide. 3. Generating predictable recurring To phase out natural gas trading revenue sources. Traditional activities, increase the green revenues from fossil fuels were share of power traded, and work volatile due to geopolitical with suppliers to reduce carbon factors and fluctuating emissions from manufacturing commodity prices. Thanks to and installing renewable energy. the subsidies it receives on its wind-based energy, Orsted moved fixed pricing to 81% of its portfolio in 2018. If government policies were to change in line with the Paris Agreement, then two thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investments held by banks and insurance companies in sectors like coal, oil and gas. Source: Bank of England 11

How Leaders Should Approach Transition Economic transitions are complicated. Partly because the pace of transformation varies according to regional and social factors. As the OECD highlighted in a recent global summary of low-carbon energy transitions, corporations, NGOs, and governments follow different paths to sustainability. In his influential book, ‘The New Market Leader’ Fred Wiersema makes the case that market leaders need to In terms of sales and growth, market continually innovate and transform leaders outperform their peers by their businesses to stay ahead of a factor of between two and 10. their competition. To become a Corporations need to develop a state market leader, corporations must: of continuous readiness to address Source and implement new the next big, complex challenge as it concepts from inside and outside emerges. the corporation. The best way to tackle transition Create new ventures. risk is to chop it into smaller chunks. This means assessing one driver of Mitigate emerging risks. change at a time and considering its implications by applying a range of external parameters, as discussed in pages 12 - 21 below. 12

1. Urbanization and The Digital Society The global population will reach 8.5 billion in 2030. The bulk of this growth will be in developing countries with limited access to primary resources and sanitation. People over 60 will make up 42% of Happily, there are opportunities on the total population by 2070. This the horizon. Megacities are gaining poses important questions about how more autonomy. They can set their to address the shortfall in working- own social and economic priorities. age adults able to pay the taxes This makes them increasingly to support older societies. At the influential in delivering the UN same time, future migration patterns Sustainable Development Goals. remain uncertain due to geopolitical Involving citizens in social innovation factors, environmental degradation, and urban governance is also and climate change. starting to provide new perspectives Urbanization is the dominant trend and potential solutions to urban across the world. Sixty-eight percent challenges. of the world’s population will live in Our cities are also fast becoming cities by 2050, compared with 55% smart cities. Smart cities interconnect today. As populations urbanize, logistics, utility, and telecoms access to reasonable living standards providers within local infrastructures. will emerge as an issue for the most They can gather and analyze data vulnerable. from the Internet of Things to predict The search for better economic and influence behavior. While smart opportunities will likely increase and technologies can deliver efficiencies lead to further issues with social and cost savings, they also introduce cohesion. Europe’s population a new raft of data privacy and projections suggest that, barring security risks that will need to be a significant restructuring of the addressed. economy or welfare policy, the continent will need to increase the immigration of working‐age people from outside of Europe to support an aging population. Environmental and climate change are major drivers of international and urban migration. When droughts led to crop failures and water shortages in Western Asian regions, the resulting migration to cities led to rising unemployment, political unrest, limited access to food and sanitation, and finally, to open conflict. 13

CASE STUDY Transitioning to Smart Cities Global cities Smart cities could be one solution. Because 80% of the city’s residents Our cities could prove more resilient live in public housing, government account for more and better able to grow sustainably agencies work with private firms to than half of the by integrating big data, IoT, and test smart home technologies. These advanced analytics. include home energy and water world’s population. The execution of this concept is management systems and monitoring still in its infancy. Yet planners and systems for the elderly. The city has The United Nations politicians hope that leveraging also deployed health pilots to support projects they will ‘smart’ technologies will meet the its growing elderly population with demands of citizens and deliver new services designed to promote grow to 68% of value-added services more efficiently. independent living and quality care. the total global Connected networks, smart devices, Connected Life is a Singapore- sensors, and applications will based health care solutions provider. population by mid- collect data on energy usage, traffic Its home monitoring solution uses century. patterns, waste, pollution, and crime, DEX – a decentralized citywide and optimize infrastructure and data exchange – to provide insights management systems. to health providers, the insurance How will cities Making that data available to industry and the government. The provide energy, everyone through open-access solution combines smart technology systems would allow citizens and (motion and sound IoT sensors, data water, sanitation, businesses to benefit directly. analytics and AI) with 24/7 personal Inhabitants could utilize the assistance and customized insurance and other basic information to create the insights coverage. It provides caregivers with needs as their they need to make better decisions. real-time information and insurance companies with better data. populations Singapore is an early mover in this Other cities such as Amsterdam, balloon? field. With Virtual Singapore, the city Barcelona, Copenhagen, Dubai, provides a dynamic 3D city model London, and New York are following and collaborative data platform suit. They’re also creating citywide using government and private-sector data platforms to enhance services data. Public and private firms can and create economic value by access this platform to develop tools developing practical use cases for for testing new services, such as analytics and AI applications. simulating crowd dispersions from future sports venues. While these developments’ potential is exciting, they also create privacy and data security risks that need addressing. 14

2. Environmental Risk Mitigation Requires New Modelling Techniques Human activity has caused approximately 1.0 °C of global warming above pre-industrial levels. This is likely to increase by another 1.5 °C between 2030 and 2050 if current rates continue. Climate change, air quality degradation, and the loss of ‘natural capital’ and biodiversity are highly interconnected and mutually reinforcing. They may lead to catastrophic consequences for the planet’s ecosystem. Air pollution is the primary environmental contributor to disease globally, for example. It causes between six and seven million premature deaths each year. The most significant share of that burden falls on developing nations. Water quality has worsened across the world. As a result, antibiotic‐ While modelling could predict resistant bacterial infections are subsequent changes in the climate, projected to become the leading we cannot say the same about cause of death worldwide by 2050. emission scenarios and integrated Plastic pollution, chemical pollution, assessment models. They are unable and electronic waste are also a to interpret non-linear dynamics. growing issue, not least in our oceans. This makes them vulnerable to These increased risks boost interest deconstruction and re-evaluation. in geoengineering – leveraging This means we must exercise extreme new technologies to manage solar caution when extrapolating and radiation and remove CO2 from interpreting economic models to the atmosphere. However, many address environment and emission- uncertainties remain about the ability related issues. The recommendation to achieve net removal of CO2 since is to integrate evolutionary the technologies in question currently approaches, customer experience emit CO2 and other air pollutants. modelling, and system thinking with traditional techniques to design compelling new models. 15

CASE STUDY Solar Geoengineering Solar Solar geoengineering involves using Parametric-based policies can techniques such as ‘brightening specify a physical index (like rainfall) geoengineering is clouds’ to reflect a small fraction of and a value of that index above or a technology that incoming sunlight back to space, below. A payout is automatically thereby counteracting global triggered according to the terms of aims to moderate warming. the insurance contract. The index Solar geoengineering could reduce serves as a proxy for a particular climate change. It regional climate hazards such as peril (like flooding). When applied to has the potential extreme temperatures, tropical climate change, parametric insurance to mitigate and cyclone intensity, or rises in sea is known as climate risk insurance. levels. However, evidence suggests But parametric insurance has reduce greenhouse that solar geoengineering cannot its limitations too. One potential mitigate all threats equally. Unequal pitfall is that the indices can fail to gas emissions and application of solar geoengineering correspond to the real-life effects to remove carbon could induce climate change risks. of climate change. Slow sea level For example, it could create localized rises not punctuated by discrete dioxide emissions. hydrological changes that would events would fail to trigger an index, cause flooding in some areas and resulting in long-term damage droughts in others. This would without any payouts. Parametric require new supplementary insurance insurance can also be expensive mechanisms to compensate any compared with other forms of possible victims. risk financing, particularly in more Experts have suggested using developed markets. parametric insurance to manage this risk and provide compensation. Parametric insurance ties payouts to objective environmental indicators. When specific indicators are hit, payouts are made automatically – and instantly – without the need for loss adjustment. 16

3. Smart Production and The Circular Economy A growing population means increased demand for food, agricultural feed, and water by 2050. An expanding and wealthier middle class is switching to higher-fat foods and animal-based proteins. The increased demand for land for cultivation will come at the expense of natural ecosystems and biodiversity. At the same time, water consumption is spiking. The combination of climate change and soil degradation is expected to threaten agriculture’s viability in many parts of the world. A linear economic model — ‘produce, consume, dispose of’ — is fundamentally unsustainable. It relies on ever‐growing consumption of natural resources and processes that generate waste and emissions. By contrast, a circular economy model is based on the idea of closing material The concept of the ‘circular economy’ loops. It aims to maintain the value has become prominent in both of products and resources for as long European and Chinese policymaking as possible within the economy by as a way to pursue more sustainable returning them to the product cycle use of natural resources. The at the end of their use. This “recycle, European Union suffers from resource reuse, and resell” model minimizes scarcity. It is highly dependent on waste generation. metal ores and fossil fuels from the rest of the world. It exports primarily processed goods for final and industrial consumption. Therefore, it must deploy circular production, delivery, and consumption models to build and deliver products to market. To minimize resource scarcity, the EU must invest in recycling capacity and circular economy business models. Indeed, the European Union adopted its Circular Economy Action Plan in March 2020 to make this the backbone of future European industrial policy. 17

CASE STUDY Caterpillar’s Circular Economy Business Model Caterpillar is For many years Caterpillar was by allocating resources to the renowned for selling heavy- enterprise’s most profitable parts. a Fortune 100 duty machinery and providing Caterpillar developed financing and corporation maintenance services to construction insurance to increase customers’ companies. From observing their ability to achieve their business goals. that develops, customers’ activities, the group It also deployed IoT devices to collect realized that construction firms were 100,000s of data points connected manufactures, and not interested in operating heavy- to their assets, enabling predictive sells machinery, duty machinery. They had little maintenance to reduce the risk of expertise or experience regarding downtime further. financial services, safe or efficient usage. When the machines broke, the customer lost Improving Caterpillar’s operational and insurance revenues. performance in this way took a through a global Understanding this allowed company-wide commitment, but the dealer network. Caterpillar to develop new service- results were significant: led propositions. Inspired by previous Within construction, product quality It is the world’s leading manufacturer examples from the likes of Rolls improved by 40%. At the same time, of construction and mining Royce and BAE Systems, Caterpillar assets deployed shrunk by USD $3.3 equipment, and diesel and natural provided machinery-as-a-service. billion. The group can build more gas engines. Through its operating and execution while reducing its manufacturing (O&E) model, Caterpillar operates facility footprint by 7.9 million square The company differentiated itself and runs the machinery on behalf of feet. from its competitors by focusing clients in return for a fee, minimizing on offering services throughout the downtime and improving operational Caterpillar reduced its breakeven mining and construction life cycles. efficiencies for itself and its clients. point within resources every year Also, rather than aiming to use less since 2012, enabling the business to material to develop new assets, they This model also allows Caterpillar move to autonomous electrification created a product that could be to employ its circular economy to streamline and optimize the ‘remanufactured’ several times. This framework, prioritizing designing product line. is the basic premise of the circular effective products and systems for economy. Caterpillar is often cited efficiency. The model systematically as a leader in this field, particularly builds a competitive advantage regarding its use of new technologies to recover more value during the remanufacturing process. 18

4. Hyperconnectivity, Digitization and Technology Acceptance It is too soon to predict the impact of technological innovation on sustainable development, particularly when looking at the greenhouse gas emission created by data centers. Yet it is clear that the lifestyle and societal benefits of technological innovation come with significant potential risks to sustainability, social cohesion, and privacy – not least when it comes to mass surveillance or social media manipulation. Consider AI algorithms, for instance. A ‘black box’ algorithm is one where we don’t understand why the algorithm works the way it does. By contrast, ‘white box’ algorithms are those we can clearly understand – both in terms of how they work When looking at energy-led and what factors influence them. transitions, we also need to observe Black box algorithms are simply too the impact of technologies, unpredictable – and thus too risky. resources, and pollutants on the To avoid unintended consequences, ‘rebound effect’. This describes the market fixing, or backroom effect whereby using renewable manipulation, we need to transition energy sources creates risk in new towards a white box future for AI, unforeseen areas. Such risks may among other criteria including ethical negate the potential sustainability design, privacy considerations and benefits from improving another area secure data storage. of the value chain. Another potential risk is the lack of An example of a rebound effect skills to maintain and manage these includes for instance spending the technologies. The current technology money saved on energy bills on a convergence is itself disrupting flight to a faraway country. business models and making many job roles obsolete. The ability to We must mitigate the potential risks source and develop talent is likely of investing in emerging technologies to become an ever more pressing and balance them against the challenge. potential benefits. Some tools that could prove effective in helping us do Many companies are generally this are: aiming to achieve a more circular, bio‐based, carbon-neutral, and Research & development. non‐toxic economy. This is positive, Adaptive governance. but why stop at the usual suspects? Without a genuinely holistic Market foresight, and horizon and approach covering all sectors of the media scanning. economy, our progress is likely to remain limited. 19

CASE STUDY Schneider Electric Schneider In December 2015, SE committed to addressing the climate crisis and deployed internal targets designed Electric (SE) was to limit global warming to 1.5 °C. SE’s sustainability recognized as the strategy is based on five pillars, which it uses to most sustainable target its ESG efforts more effectively: corporation Climate globally in 134 million metric tons of CO2 saved by SE customers due to EcoStruxure energy and sustainability offers Corporate Knights’ and services. These proactively manage energy, 2021 annual carbon, and resource footprints. report. Circular economy 77% of sales generated under SE’s new Green Premium program. Health and Equity 100% of SE employees work in countries that have fully deployed the firm’s Family Leave policy. Ethics 94% of sales, procurement, and finance employees receive annual anti-corruption training. Development 281,737 underprivileged people trained in energy management. The next page examines SE’s work on the five pillars in more depth. 20

CASE STUDY: Schneider Electric SE invested in Climate Health and equity or acquired tech SE has been working on becoming SE takes its health and wellbeing ventures in the carbon neutral, aiming for net-zero commitments seriously. It has policies emissions within its operations around wellness, safety, fair living fields of electric and across its entire ecosystem of wages, flexible working, incentive customers and partners. plans, and learning and development charging, electric The company develops new programs for employees and mobility, AI, technology and services in line with suppliers. It implemented a gender- circular economy principles to deliver inclusive culture with a particular IoT and cloud on these goals. It invests in EV and focus on flexible and part-time work, solar energy partnerships to identify which helped the company increase platforms, solutions to protect the environment. its workforce. trackers, power Ethics controls, and SE uses ecological footprint accounting to assess the footprint of New crimes are gaining traction renewable, its activities. The group also deploys because of advances in technology energy management and industrial – cybercrime and biological warfare, solar, and clean automation (IoT and AI) to accelerate for example. SE believes this energy providers CO2 emission reduction while demands a greater focus on ethics, partnering with various experts in the transparency, and integrity. As such, to deliver their field to address waste and plastic SE aims to develop ethical operations removal. as a cornerstone of its growth strategy. Circular economy through ethical, compliance, and cybersecurity programs. SE recognizes that consumption Development needs to align with the environment’s ability to regenerate. As a result, the SE considers access to energy and group employs circular economy digital technology to be a human principles to design products and right. Therefore, the group works on services that are less resource- improving the living standards of intensive. those populations in rural locations SE repairs and retrofits its products. where they operate. This lowers the cost of ownership and the environmental footprint for its customers. Using a rental model also encourages customers to use products for more extended periods. 21

How to Identify Transition Risks According to the International Energy Agency (IEA), the share of renewable energy in global electricity generation had grown to 26% by 2018. We have made progress. But 80% of today’s energy systems still depend on fossil fuels. Changing the existing infrastructure takes time. The path to addressing the energy transition will be different for every country. As highlighted by the cases shared above, government organizations and private companies are deploying various strategies to meet their sustainability commitments. This translates into the following three approaches. Operations Products and Value chain A recent KPMG services Companies must study highlighted The design, production, engage, support and that those businesses and distribution of new train value chain most impacted by products and services partners and customers the pandemic were must meet sustainable to apply sustainable those with operational development practices. They must strategies biased requirements. This invest in socially toward short-term, means reducing the responsible activities localized thinking. use of raw materials and remove those with Companies need to and applying circular deficient sustainability continuously build economy principles development practices resilience within their wherever possible. from their value chains. business models by Organizations must looking at sustainability design products that constructively, require less water, comprehensively, and produce less waste, and longer-term. They must use less plastic. improve their business practices and empower people within their operations. 22

Companies are also seeking to meet their sustainability commitments across three scopes. Scope 1 Scope 2 accounted for. All direct Indirect Scope 3 sustainability - sustainability - All other indirect related impact from related impact from sustainability - the activities that are emission-related under the control of purchases and their use related impacts from an organization. This by the organization. the organization’s could include scenarios Here the fossil fuel is activities occurring such as onsite fuel used to produce an from sources that combustion or usage asset. The emissions they do not own or of gas boilers, pollution created during the control. These are from fleet vehicles, and production of that usually the largest share air-conditioning leaks. energy and used to of greenhouse gas make a good must be emissions and carbon footprint, covering emissions associated with business travel, procurement, waste, and water. Insurance players have made significant advances in addressing physical, liability and operational risks, particularly when it comes to climate risk. Physical risk Liability risk Operational risk Property damage, Incurred by those Loss resulting from global supply chain parties who have inadequate or failed disruption, and resource suffered loss or damage procedures, systems scarcity resulting from from the effects of or policies. Employee droughts, floods and physical threats and errors. Systems failures. storms that impact seek compensation Fraud or other criminal tangible assets such as from those they hold activity. Cybersecurity wind turbines or green responsible via costs risks. Any event that buildings. passed to insurers. As disrupts business as transition risks develop, usual processes. these will become the root cause of new liability risk types. 23

Environmental risks Societal risks Governance & economic risks Environmental risk Talent aquisition risk Technology risk Emission risk Worker risk Value chain risk Financial risk New risks are emerging as we learn what transition means for businesses, the economy, and the public. Here are additional risk types we believe will become more prominent in the next few years: Environmental risks Environmental risk Emission risk Business activities such as water The impact of emission-related withdrawal, chemical usage and activities on the environment, anything else that poses a potential including CO2 and methane threat of adverse effects on the emissions. environment by effluents, wastes, or resource depletion. Also includes deficiencies in waste management, including water contamination, spillages, oil discharge, and hazardous waste disposal. Societal risks Talent acquisition risk Worker risk Includes the impact of corporations’ The impact of work and business activities and decisions when activities on employees and recruiting talent from generation Y contractors. These would include and Z, who seem more inclined to days away from work, injuries and evaluate and join a business based fatalities, and issues with process on its sustainability principles. safety and severe vehicle and on-the- job accidents. This also relates to the impact of business activities on the public and society. 24

Governance and economic risks Technology risk Value chain risk The potential for a technology The process by which organizations failure to disrupt a business - for take strategic steps to identify, example, a service outage or data assess, and mitigate societal security incident. Technology risk transition and environmental risks also comes into play within the within their supply chains. This risk design of products and services is directly linked to relationships requiring digital components. This with suppliers, partners and even risk requires the identification, customers. categorization and prioritization of hardware and software threats to Financial risk reduce the potential negative impact Any risk that can result in the loss on businesses. Today, this would of capital for parties investing in also include the result of investment a project or a business venture. choices. It also entails re-pricing carbon- intensive financial assets yielding a negative financial revaluation or the devaluation of assets due to sustainability-led government policies. Mishandling any of these risks could result in reputational risk - the negative publicity or public perception resulting in longer-term revenue loss. 25

BigTech’s Sustainability Problem In 2016, the world threw away 49 million tons of electronics waste—roughly the equivalent of 4,500 Eiffel Towers. By 2021, experts estimate that number will grow to more than 57 million tons (another 735 Eiffel Towers.) In the US alone, consumers dispose of millions of dollars of electronics every year. Only 20% of that is properly recycled. The rest ends up clogging landfills and leaking toxic chemicals. To offset this waste, big consumer The industry still has a long way tech companies have announced to go in terms of governance best significant sustainability targets. practices. Because Big Tech players’ assets are almost entirely digital, it can be Yet it is interesting to see them take harder to track their progress. some drastic steps to improve their footprint and brand reputation in the wake of public and governmental pressure. 26

The Good, The Bad and The Ugly: Big Tech Reduces its Carbon Footprint Some of the Big Tech companies are recognizing the pivotal role they play as leaders and role models within the sustainability movement. From reducing their own carbon footprint to reducing that of their customers and suppliers, each of the five Big Tech firms has announced - or is executing - plans to increase its sustainability. Alphabet (Google) Apple In May 2020, Google confirmed that Promised to reduce greenhouse it would no longer build customized gas emissions, announcing that by artificial intelligence technology or 2030 ‘every Apple device sold will machine learning algorithms for the have net-zero climate impact’. This oil and gas sector. It also pledged means both immediate changes in to include recycled material in its systems and indirect reallocation of devices by 2022. funds outside the company. Apple will reduce emissions by 75 percent in Amazon its manufacturing chain by recycling Its trucks, packaging and more components and encouraging distribution systems give it a massive its suppliers to use renewable energy. environmental footprint. Even its The company plans to rebalance recycling process is highly energy- the remaining 25 percent by intensive. In May 2020, Greenpeace funding reforestation projects and also called out Amazon (alongside improving its operational efficiency. Google and Microsoft) for using AI Activists claim companies that and cloud computing devices to help offset emissions through external oil producers find and extract oil funding allow emissions to ‘grow at and gas deposits. In an attempt to a time when the scientific consensus reduce its carbon footprint, Amazon demands that emissions be cut in has invested in or developed 127 half by 2030 to avoid the worst renewable energy projects and effects of climate change—and be declared itself the most prominent reduced to zero by 2050’. corporate buyer of renewable Microsoft energy in 2020. It also convinced 13 companies, including Microsoft and Asked its suppliers to report Unilever, to join its Climate Pledge emissions. In September 2020, initiative in 2019. Microsoft was reported as having explored underwater data centers. Facebook The company also announced the Has taken a hit for not censoring second phase of its AI for Earth the spread of misinformation about program – a new biodiversity climate change on its platform. initiative in the form of a ‘Planetary The company confirmed it would Computer’. And it announced plans use 100 percent renewable energy to become ‘water positive’, meaning in its facilities and reduce its data it will replenish more water than it centers’ water usage. But it has yet to consumes by the end of the decade. demonstrate how it intends to stop So are those good, bad or ugly? the spread of climate disinformation. 27

Suggested Paths to Deliver a Successful Transition Findings from a virtual event we ran on The Transition Economy on March 4th 2021. Experts from the fields of sustainability, emerging risks, healthcare and operational effectiveness discussed challenges and opportunities in a series of breakout sessions. Here are some of the conclusions reached from each virtual discussion. 28

VIRTUAL DISCUSSION Sustainability & Climate Change: More than ESG Metrics The challenge of transition faced by industry and its race to meet climate targets, whether internally measured or externally imposed, will require an unprecedented level of action. History has repeatedly demonstrated that change comes from the fringe, not the center, and mostly it is Nicole Anderson bottom-up. Private market capital has a serious CEO & Managing Partner role to play in fueling the technology innovation Redsand Ventures and the brilliant entrepreneurial minds that will and can provide many of the solutions so desperately needed right now to accelerate execution. From Challenge to Resolution to Solution There is a 3-point Environmental, Social and Governance (ESG) framework for insurers to evaluate when engaging with sustainability-related initiatives— setting paths ‘From challenge to resolution and solution’. 1. ESG Challenges ESG is now worth around USD $40trn in funds being funneled to the most efficient fossil fuel users and adopters of renewables to drive the transition to better energy sources. More than 450 investors managing these funds have now signed up to Climate Action 100+ climate initiative program. Still, the space remains highly heterogeneous. Investors, asset managers, and ESG rating providers differ on which issues are important and how to address them best. As a result, defining ESG is almost impossible. Even creating consistency around scoring ESG is a challenge, with about 300 ESG data providers in the market already. According to a Deloitte report, just 3-5% of insurers are prepared for climate change-related liability - physical and transitional risk. Now they must consider transition risk as part of a larger agenda. 29

When addressing the challenge of quantifying these transitional risks, there are several questions we should ask ourselves: Is this something that keeps our executives awake at night? How is this strategic path playing out in terms of ESG in the organization? Where does ESG sit? Who has accountability for it? Is there enough awareness of how that strategic path is articulated to those who have to deliver it? 2. ESG Resolution ESG is not just a threat. It’s also a real market opportunity. In 2019, Mark Carney stated that combating climate change is ‘the single biggest investment opportunity in history’. According to an Oliver Wyman report, the transition to a low carbon economy represents ‘the single biggest growth opportunity’ for global financial services. Yet this hasn’t percolated down through most organizations. The majority of insurance executives still appear to be focused on improving disclosure rather than revising business strategy to support the transition to a low-carbon world. How big is the market opportunity? How do we articulate it and start uncovering growth options and deploy a new execution mindset? Financial services and insurance providers display an increasing appetite for engaging their retail customers and commercial customers on sustainability. But there is more to be done. As highlighted above, even though asset managers are redirecting their investment funding towards responsible investing, they are still lagging behind. High level sustainability blueprint Financing Investing Analyzing Insuring Reporting P2P lending & Portfolio Geospatial Transition risk PCAF, TCFD, microfinancing evaluation analysis modeling CPA, CASB, CDP reporting TransitionTech Thematic fund 1.5e modeling P&C risk Impact reporting programming creation assessment Commercial ESG scoring Scope 1, 2, Historical claims Shareholder project financing for traded 3 carbon review advocacy voting companies accounting Green bond Deal-flow Climate risk Risk vs. impact Annual reporting insurance analysis service analysis evaluation & regulation compliance Electrification/ Transitional Fossil fuel Biodiversity Transition risk gasification divestment dependency risk protection premium accounting guidance modeling modeling Source: Based Redsand Ventures workshop design for 4th March 2021 30

3. ESG Solutions Unique opportunties are emerging within the underwriting and capital allocation sphere. The World Wide Fund for Nature recently released a paper on ‘spatial finance’ looking at innovation that blends climatic data, aerial data and IoT-based data with traditional risk and modelling patterns. The ocean economy is one example of where applying this approach would be very useful, particularly in the shipping sector. 31

VIRTUAL DISCUSSION Emerging Risks: The Future of Mobility When we talk about emerging risks, we often think about technology-led risks such as cybercrime or bio-warfare. These digital and biological risks often start from another point within the value chain. Connected, electric and autonomous driving has become part of the daily Manjit Rana conversation and one which cannot be avoided. Head of Insurance psKINETIC Spotlight on Disruption Virtually every industry is being disrupted. Typically, disruption comes from the outside – see the examples of Tesla, Amazon, Netflix, and Starling Bank. All these were outsiders to the industries they ended up changing forever. 1. Disruption Covid has been a shock, accelerating pre-existing disruptive trends. Offline retailers collapsed like dominoes. Airlines are struggling to survive. Car sales dropped 90%. Simultaneously, Amazon created an additional 250,000 jobs in Q3 2020, and Zoom revenues rocketed by 370% in Q4 2020. The insurance industry has always claimed it’s too specialist to be vulnerable, but is that true? Covid exposed our vulnerabilities, too – particularly regarding customer servicing and claims fulfilment. Consumer behavior has evolved – again accelerated by Covid. Digital adoption has increased. Mobility patterns, shopping behavior – even interpersonal behavior – have changed. There seems to be more of a community focus now compared with pre-Covid. The ways we educate and learn, exercise, consume entertainment, work, and travel are all evolving. 2. The Impact The impact on the insurance sector has been dramatic. The number of claims has dropped in retail insurance. Business interruption has become a thorny issue. Cybersecurity incidents have increased, with virtually every insurer now trying to put together stronger cyber propositions. Insurance is being disrupted. Virtually every insurer is now considering on- demand, parametric, embedded insurance – wanting to move away from traditional insurance models to new types of insurance and revenue models. But the crucial thing about shocks and disruption is that they also create opportunity. 32

3. The Opportunity It’s helpful to consider a hypothetical situation to illustrate just how far insurance could evolve. Imagine that Amazon has bought BMW. You work there. You have USD $1bn to play with, and you know that Amazon wants to use this acquisition to disrupt the insurance industry. What kind of new proposition are you keen to develop? Actually, the question that needed addressing was what kind of propositions could we create in a world that is changing and transitioning to new modes of transport? What do we think our Mobility-as-a-Service offering could look like in alignment with current sustainability trends? Who is our target market? What challenges are we addressing? What kinds of services could we create? How would we disrupt the traditional insurer market? What if we were not allowed to make money from selling cars? What new types of risk are we likely to see emerge? We needed to confirm the baseline assumptions about what services people will need. For example, virtually every car manufacturer that I talk with believes that selling cars is not how they will be making money in the future – they’re looking at subscription-based models instead. Could the vehicle act as a platform in the same way as a smartphone does? BMW is already thinking about this, as they expect to sell far fewer cars in the future. They have also made a significant investment in analyzing, assessing and defining what the future of mobility will look like—evaluating the impact on adjacent sectors such as finance and insurance. BMW is an active investor in new technologies across transport and logistics, travel and hospitality, vehicle, environment, energy, and emerging technologies. From an insurance viewpoint, they explore how the electric and autonomous vehicle markets will evolve and what the changes will mean for customers’ end-to-end engagement. In brief, how can we analyze macro trends? Can we anticipate disruption within operations, futureproof our value chains, and seek to serve customers’ different and evolving needs in a simple, engagement-led and integrated way? This is the kind of deep thinking and analysis insurers need to anticipate so they can develop methods of minimizing the effects of change and disruption to become more sustainable, to grow, and to thrive. 33

VIRTUAL DISCUSSION Mitigating Transition Risks in Health and Wellness Working within ecosystems including customers, academia, hospitals, banks, insurers, and other key market players not only provides new unique ways to look at problems but also differentiating paths to designing, developing, and delivering Kjell de Orr innovative products and services that Director of Strategic individuals and societies want. Within the Partnerships, Global CoCreation Lab health and wellness space, great advances have already been made to apply technology to the current societal challenges faced by older generations. Building Long-Term Healthcare Resillience Societies that fail to invest in medical research and development, innovation, and entrepreneurship risk losing their long-term healthcare security and resilience. We have a moral imperative to collaborate with communities to accelerate the pace of medical innovation and introduce transformational solutions and technologies to society faster. 1. Co-creation The Co-creation Lab model is a great way to co-create with the private and public sector, to combine finance, government, academia, medical technologies, innovation-driven enterprises, and investment through community-based collaboration. This enables organizations to validate concepts through venture building and spin-off those ventures to allow them to scale from the ground up. As we all acknowledge, the transition economy comes with transition risks. These risks give rise to some urgent questions to which we need to find the answers. Initiatives must address emerging needs for combining both health and wellness into solutions that focus on the wellness and quality of life of older and younger generations alike. It should also serve the needs of underserved market segments seeking affordable, ethical care, and allow them to be cared for safely and consistently from home. 34

2. The Questions 1. How can we make healthcare and wellness innovation more sustainable? 2. What healthcare and wellness areas are ready for innovation? Do they currently present a market risk or a market opportunity? 3. What can insurance companies offer as new health and wellness opportunities? The best way to answer these questions and mitigate these risks is to examine the rising health and wellness trends. 3. The Trends Elderly Health and Longevity The elderly are increasingly becoming healthier, more tech-savvy and more active individuals with a variety of needs, from loneliness to augmented care. In our work, we have seen solutions such as AI-led rehab support become instrumental in supporting the elderly with their long term care. Collecting and analyzing various data sources will help to offer more tailored health support and a more comprehensive range of supportive financial services. Insurers could also potentially act as a collector and covener in this area - limiting the potential risk of fraud. Mental Health Thanks partly to the impact of Covid, there is more awareness and less stigma around mental health. Emerging initiatives seek to identify links and dependencies among various health issues – for example, the connection between mental health and cardio health. The question is how insurance companies can help facilitate the evaluation of often siloed but interconnected ailments? Healthcare Equity Minorities have different healthcare needs to Caucasian populations, and women have different needs to men. They often require tailored solutions which are not readily available in the marketplace. Much work is being done to develop personalized medicine, using pharmacogenomics among other advanced technologies, specific to the insurance needs of women or minorities. How can insurers think out of the box to protect, prevent and mitigate unforeseen risks and make access to treatment affordable to underserved consumer groups? Data Ethics and AI Biases Ethics and biases embedded within advanced analytical models being created today are gradually being recognized as one of the most significant issues across the healthcare sector. We need to start asking ourselves how insurers can work together to eliminate and mitigate endemic discrimination and exclusion resulting from poorly designed AI models. Wellness Homes Wellness homes could provide more sustainable living environments for all incomes, ages, and healthcare conditions. Some homes are being developed from the ground up. Others are retrofitted with new designs and technologies. Data capture and analysis becomes a core part of the design of these smart and sustainable homes. What would such designs imply in terms of insurance products and services? 35

VIRTUAL DISCUSSION Operational Resilience: From Surviving to Thriving The disruptive impact of financial technology seems a dominant megatrend for the next generation. This megatrend creates challenges and opportunities for existing insurance core processes, forcing them to improve and disrupt in new ways. It Will Hawkins also questions the wider value proposition Director of Research – Europe of insurance within the bigger universes Keefe, Bruyette & Woods of risk and investment management, as the global insurance industry may be in a bigger state of flux than many observers appreciate right now. Mastering Operational Resillience According to the UK’s Financial Conduct Authority, operational resilience is the ability “to prevent, adapt, respond to, recover, and learn from operational disruptions”. The Right Balance The real question for insurers is to what extent we are talking about operational resilience being a product that you provide to the customer, or a service that means your customer doesn’t need the products as they’re currently structured? Indeed, an active investor assumes that market efficiency occurs in the future, not the present and therefore plans for uncertainties and any disruption in macroeconomic trends. While often centralized, operational resilience requires the right balance between risk management, business management and customer engagement. 36

So what is next? What does success look like? How can we create an enabling culture versus a do-nothing culture? What model should we use to look at risk and resilience going forward? What are we trying to be resilient to? What forces or pressures are we resisting? What do we want to withstand? How should we measure operational resilience? Do we focus on leadership? On monitoring versus supervising? What metrics do we focus on, and why? Where can technology best help? How can technology help to streamline processes, monitor results, and encourage buy-in? FinTech and InsurTech are both still in their infancy with regards to how they can disrupt global economies. But the critical operational resilience theme for the 2020s is the extent to which insurance technology changes the dominant capital management framework in insurance that’s been anchored to the point of cash acceleration to finance dividends. For many incumbent insurers, this could lead to some difficult decisions about allocating capital over the next decade and how that will be conveyed to their investors. Fast-tracking Operational Resilience… Strategy and operational resilience do matter, and successfully embracing technology is as much about execution as it is about strategic vision. To mitigate transition risks and embrace technology more effectively, insurers can focus on the following three areas: Risk Management Technology offers the opportunity to enhance risk management, moving away from the existing indemnity model in Property & Casualty and Health insurance. The fundamental value proposition of insurance lies in avoiding having to claim in the first place, which benefits insurers and the insured. Business Management Many InsurTechs want to partner with incumbents by providing operational and back-office business management services. Although this offers incremental efficiency improvements, the implications are still radical, especially when considering the massive potential cost savings. Further, InsurTech-as-a-Service solutions that have entered the market provide digital services from the ground up and are becoming compelling options for accelerating the launch of digital products and services. Customer Engagement InsurTechs help insurers engage more – and more positively – with customers than in the past through mobile-first digital engagements. What will those new engagements look like in the future as more and more companies participate in interconnected ecosystems to accelerate the distribution of products and services and speed the delivery of digitized insurance models? 37

Implications on the Insurer’s Business Model When looking at the transition economy and transition risks, companies in the insurance sector want to know what that means for them in practical terms. How can they change their business models to mitigate the risk and take advantage of the upside opportunity? From our extensive research, we’ve identified three types of business models that successful companies have been adopting in recent years: Service-led business Circular economy business models models Products are shifting away from In practical terms, this involves ownership to usage - to products and moving away from the take, make services that are shared, streamed, and dispose of the linear model we or leased. Many companies doing are used to, and moving towards a well with their transition use this to circular, closed-loop business model, utilize resources more efficiently and which requires recycling, reusing and significantly reduce waste. repurposing every extendable asset Take the example of Apple - recently within our value chains. named by analysts as one of the Italian bancassurer Intesa Sanpaolo best-managed businesses worldwide. has been implementing circular The iPhone is one of its products, economic strategies for years. while the Apple iPhone upgrade In the InsurTech space, Swedish program represents the service. By InsurTech Omocom has developed moving people from buying the a parametric model to enable the device to its upgrade program, Apple insurance of circular business models. can start meeting its customer needs with access to the latest products and ensure that its iPhones are recycled properly across its value chain. There are many other examples, but the fact that the world’s best-known company is more and more reliant upon a service model should give us all pause to think about how to incorporate this kind of model in our businesses. 38

Ecosystem-led business models No one can exist on their own anymore. Companies need to build effective and trusted digital ecosystems to provide a broader range of services from a curated range of quality offerings, fully aligned with a segment’s profile and characteristics. Ecosystems allow different parties to concentrate their resources and efforts on what they do best and engage in collaborative commercial models to solve the most pressing customer needs without designing and developing assets from scratch. As we shape the future of insurance, we believe that those companies most likely to thrive as they execute on their transition are those that will gradually combine all three of these business models into one. In a time of significant transition, corporate venturing offers a smart approach to managing long term and unpredictable risk. Mitigating transition risks will require: Conducting deep thinking. Deploying risk mitigation techniques and frameworks. Combining existing assets and capabilities with new, more digital ones. Taken together, these steps will accelerate an organization’s ability to set targets, deliver against those targets, and ultimately drive competitive advantage. Based on our extensive cross-sector investigation into transition risk, we’ve refined a proven venturing validation and commercialization approach. We have been working with market-leading European insurers for over two years to take advantage of the transition economy through an effective and practical corporate venturing framework. 39

Growth Framework: De-risking Insurance Venturing Many businesses would like to mitigate the risks of their decision. They prefer to begin by partnering with a few smaller companies, or investing in or building one venture at a time. Only then will they start looking for opportunities once the initial project is sucessful. This is a path to failure. Only one The three ingriedients include: in 10 ventures will be sucessful, and 1. Investment in ventures able only a further two in 10 will deliver to build winning propositions, expected returns. So the stats show shape business models and that your first venture has a 70% then partner with other market chance of failure. players that appreciate the value A successful diversified portfolio of collaboration to enter new approach requires three ingridients. markets. The business partner mis partner with 2. They consistently consider a and invest in multiple ventures, seek diversified portfolio of investment to build winning offers and business deals that offer the proper models, and then consistently balance between risks and consider a balanced and diversified returns. portfolio of investment deals that offers the proper balance of risks and 3. They may further engage in returns. venture-building projects able to yield significant long-term returns. 40

We combine both - venture building and partnering/investing. This is because one option is less resource and cost-intensive than the other. So both need to cohabit. Partnering and investing in smaller bets requires less time and resources. This results in the benefits of learning what works and what doesn’t, the ability to adapt strategies quickly, the ability to scale at speed and in building ecosystems. It is why corporations must approach corporate venturing as a thought-out and well-defined exercise in building the rationale and logic of their approach. This includes what concepts to pursue, what order to pursue them, and how to do so through strategic mapping. This will involve defining clear building blocks from priorities (known and unknown) and skills, while aligning the best assets. After all this, the next step is to narrow the range of opportunities to go after. To be successful, we need to start with a clear understanding of the corporate entity’s business priorities, strategic directions, and unique strengths. These are often taken for granted by existing companies. The goal is to start indentifying the value of every corporate asset that corporate venturing teams can use. Strategic venture mapping Venture mapping is a key ingriedient of our approach. Once we have a clear view of strategic direction, priorities, and internal strengths and weaknesses, we define your venture mapping framework. While the framework remains consistent, its underlying assumptions change from company to company. Everything is linked to the company’s direction and strategic priorities, current relationships, and approach to analyzing and understanding the core customer perspective. It is also about gaining a lens on the future shifts affecting many sectors today. 41

Identifying and sharing ideas on direction Learning from the investors’ ‘portfolio thinking’ approach is fundamental for corporations to diversify their bets and determine venturing proposals that categorize and develop incrementally. It is important not to constrain choices in the early stages of indentifying venture leads and building deal flow. Because of the depth of our understanding of the insurance value chain, we can often accelerate this process through the ecosystems we have indentified and developed for many market players. This is where open innovation, external network development, and priority mapping become essential steps to help connect the dots faster. Structured and formalized mechanisms must be in place to filter findings based on clearly agreed and defined criteria. We tend to use a series of evaluation and measurement criteria linked to whether we are dealing with process, sustaining or game-changing innovations, a company’s development stage, and the outcome that needs to be achieved (e.g. partnership, investment, acquisition, etc.). Accelerating, commercializing and scaling As we find our best bets, there are also instances where no options are available to fulfill a specific customer solution-market fit. The thinking needs to be so drastically different to yield expected returns (or shake up the sector) that new digital ventures need to be evaluated, designed and launched. We can accelerate and commercialize the due diligence of growth ventures within operations. We help our partners deliver new, more targeted products and services or augment existing value chains through experimentation, testing, and iterative evaluation. We also evaluate the businesses of tomorrow to build winning ventures based on what we learn from current digital successes. 42

What’s Next? As 2020 showed us, transition risks can quickly up-end traditional business models. The huge demographic, climate, and technological changes of the decades ahead are only likely to amplify this effect. Business leaders and boards must respond with a shift towards strategic, sustainable, long- term thinking. Nethertheless, by learning from the examples of transition risk shakers and innovators shared in this paper - and the benefits of corporate venturing highlighted above - organizations have the potential to leverage distuption into commercial advantage, to reinvent business models, and to turn uncertain transition paths into opportunties for success. Join the conversation You’ve read the findings and research from us, our contributions, and our transformation ecosystem. We’d like to hear from you. We’ll be continuing the conversation about transition risks and transformative thinking at our website and on our social profiles. Follow us and have your say. What challenges are you facing? What transition risks keep you up at night and how have you been responding? We’d love to hear from you. Meanwhile if you’d like to discuss your challenges with us in person, feel free to get in touch. We’re happy to help. By working together, sharing our challenges, and exploring new concepts and strategies, we can turn uncertainty into a clear path to success. 43

About Alchemy Crew Alchemy Crew is a venture validation and commercialization lab for the insurance sector and financial services institutions. We use open innovation, ecosystem Alchemy’s global acceleration thinking, and corporate venturing platform digitizes and codifies techniques to speed growth. We knowledge on emerging tech players collaborate with corporations and to create long-term sustainable leading emerging tech players to impact through precise execution accelerate the curation, validation, and the sharing of key learnings. It and exploitation of venture initiatives. combines the collective experience The Crew facilitates the execution of experts from around the globe of a Reinvention Engine that fast- to contribute to the emerging solves some of the most pressing networked economy. challenges across the finance sector. The Reinvention Engine unearths customers’ latent needs to shape winning propositions using internal and external assets. Using a structured collaborative framework, we work with venture teams to short-cut venturing experimentation and significantly de-risk corporate decision making. 44

Try one of our three labs R&D Lab Give us one of your most complex challenges. We will curate it and provide a deep-dive on the market circumstances affecting your business both inside and outside of your sector. We talk to your customers. We speak to experts. We speak to adjacent industries. We do the research and analyze the data to identify gaps and opportunities. We then leverage our partner vs build model to determine the best partnership and investment opportunities across growth tech and newTech for speedy decision making. Reinvention Engine Our growth engine model accelerates your ability to democratize and industrialize winning experiment opportunities. Research shows that to identify one single mega growth opportunity, a corporate venture office must spend USD $25m screening over 250 companies. In our sector, finding venture partners is not as challenging as identifying the drivers and sources of long-term competitive advantage. This is what our Reinvention Engine does for you, enabling you to identify investment and partnership opportunities and commercialize the most effective solutions. Venture Lab Delivering and replicating multiple growth engines require the industrialization of various assets, a suitable skill set, a strategic lens, and scoring mechanisms. Our learning from the Reinvention Engine often shows that businesses will want to build venturing at scale to identify many transferability paths. We take the lessons learned and accelerate a business’ ability to partner, invest, acquire, and consider venture building as growth options. 45

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