Driving greenhouse gas emissions from the world’s energy sector down to net zero is still possible thanks to the fast growth of clean energy technologies, according to the latest update of the International Energy Authority’s landmark Net Zero Roadmap.
But what are the ramifications for the insurance industry, as policymakers, regulators and activists around the world continue to push the CO2 reduction agenda? Panelists on our recent webinar Future Directions In The Race To Net Zero see challenges around mandatory reporting and disclosure requirements in the short term. But the inexorable transition will also create opportunities for well-prepared businesses.
The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) framework for promoting informed investment, credit, and insurance underwriting decisions is the gold standard globally, said Nigel Brook, partner at the law firm Clyde & Co. He said it is being adopted as the basis of mandatory disclosure regimes in many markets, especially the UK and Europe.
Miqdaad Versi, partner at consultants Oxbow Partners, said that insurers are responding to compliance differently, with some taking a minimal “tick box” approach whereas others consider it an integral part of their strategy planning. Overall, we see a direction of travel whereby the standards around disclosure and reporting will keep growing, he said.
Ryan Bond, head of climate and sustainability insurance innovation at Marsh agreed that climate-related financial disclosures are moving up insurers’ agendas, but it is not yet clear how they will influence underwriters’ risk appetite. Insurers must start engaging more closely with commercial clients to get a better understanding of how their future relationships might be impacted by climate risk disclosures. How well insurers communicate their intention will be paramount, he said.
Speaking from the perspective of a relatively new market entrant, Rachel Delhaise, group head of sustainability at Convex Insurance, said her company is a member of the ClimateWise network convened by the Cambridge Institute for Sustainability Leadership (CISL) —whose principles are aligned with TCFD. Importantly, the standards allow Convex to report against business opportunity as well as managing risk and effectively provide a framework for strategy, she said.
Insurers stay focused on net zero
Unsurprisingly, the debate turned to the UN-convened Net Zero Insurance Alliance (NZIA), after more than half its founder members quit the group earlier this year amid concerns about breaching US antitrust laws. The industry group responded in July by removing member obligations to set net-zero targets and publish their progress.
However, the political attacks on the NZIA are proving to be little more than a sideshow for insurers and their clients.
Despite exaggerated and well-publicised anti-ESG rhetoric from several US state attorneys general, there has been no slowdown in the number of requests from clients for advice on improving sustainability performance, Marsh’s Bond noted. Equally, insurers around the world will not loosen their focus on net zero as a big part of underwriting decision making.
Delhaise agreed by stating that more state regulators in the US are implementing NAIC coordinated disclosure surveys aligned with TCFD. Oxbow Partners’ Versi further argued that the overall direction of regulators towards more reporting from insurers and their clients will facilitate a path for the wider economy to reach net zero and ultimately create opportunities for insurers.
European sustainability directive
Meanwhile, insurers active in Europe need to gear up for yet more sustainability related compliance, Clyde’s Brook warned.
The Corporate Sustainability Reporting Directive (CSRD) came into force in January 2023 and expands the scope of the non-financial reporting directive. It is also intended to ensure that the information reported is consistent, relevant, comparable, reliable, and easy to access.
CSRD extends beyond the TCFD since it creates “double materiality”, Brook said. Insurers will have to report on the impact they are having on the environment as well as the environmental risks they face; it applies right across the value chain and will be phased in by company size by 2029. The new rules will apply not only to EU companies but any company doing business in the region.
The concept of materiality is important, said Versi, as it could force insurers to gather more data from insureds around their emissions, for example. It follows that insurers will then take on a stewardship role in the wider economy. While generating more work for insurers, CSRD could potentially lead to new opportunities, he said.
Delhaise said that Convex Insurance, like its peers, will need to comply with CSRD, including reporting data back to its reinsurers. CSRD will have wide ramifications, up and down the value chain, she confirmed. Marsh’s Bond cautioned that insurers would need to be proportionate in the disclosure demands they impose on clients right now, however, to reflect the progress they will make on sustainability over time.
Summing up, the panellists agreed that the coming few years will be challenging for insurers as they try to navigate emerging standards and expectations around the world’s markets. But, in line with the IEA’s bullish outlook on the demand for renewable energy, the commercial opportunities from this new environment are expected multiply.
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