An ESG Guide for the Insurance Industry
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The insurance industry is a key player in transitioning the global market to a low-emission economy. As professional risk managers, they can help communities prevent and reduce climate risk by protecting businesses, households, public entities, and governments from economic shocks due to weather-related risks such as cyclones, floods, extreme heat, and droughts. Insurers can also invest in low or zero-emission technologies and support decarbonization pathways as institutional investors.
The insurance industry has already started the transition by aligning with expectations on ESG reporting and climate disclosures. In April 2022, the National Association of Insurance Commissioners adopted a new standard that requires the use of Task Force on Climate-related Financial Disclosures (TCFD) for the annual state-led survey to protect consumers. Under the new standard, those insurers licensed within the jurisdictions that have committed to using the NAIC annual survey are required to comply with TCFD reporting as of November 2022. At the time of the adoption of this standard, that number represented nearly 80% of the U.S. insurance market. This adoption came shortly after the announcement from the U.S. Securities and Exchange Commission (SEC) about its proposed rules to enhance and standardize climate-related disclosures for investors.
ESG Alignment
With these new expectations, insurance companies will have to consider how to strengthen internal governance infrastructure, processes, and integration across the company to manage financial and reputational risks associated with climate-related investment and underwriting decisions. By understanding the climate impact of underwriting portfolios, the insurance industry can achieve several objectives, such as:
Creating transparency for stakeholders
Managing financial risks related to climate policies and regulations
Creating new insurance products to support decarbonization efforts
Ensuring that their underwriting portfolios align with the Paris Agreement
To understand climate impact, company leaders will have to assess their suppliers and clients, many of which may be small- and medium-sized businesses. In the case of insurers, that would be the clients which they insure or invest in.
Benefits of Aligning with an Insurer’s ESG Objectives
ESG reporting and disclosure frameworks ask for information on ESG and climate policies, metrics, and practices up and down the internal governance chain of command and external supply chain. As a result, what seems to occur is a natural alignment across the value chain to the standards and frameworks used. At KERAMIDA, we are seeing this alignment happen between business entities and their suppliers and/or subsidiaries on a regular basis. For example, a recent client decided to pursue an environmental certification to qualify for a request for a proposal from their biggest client. In the case of insurance companies and their clients, a similar scenario may be that a company has an easier time accessing insurance or investment, or receives better rates if they align with their insurer’s ESG objectives and in extension present lesser risk to the insurer.
ESG Standards & Frameworks for Insurers
There are several tools and frameworks available to the insurance industry and its clients to help achieve the abovementioned objectives and prepare for the new demands and responsibilities of a low-emission economy. Some of these tools, standards, and frameworks are general for all industries, however, there have been adjustments and amendments made in some to address the specific needs of the insurance industry. Each tool, standard, and framework listed below serves a specific purpose and should be considered complementary and not exclusive to each other.
GRI + SASB
The Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) are the two most used ESG reporting frameworks.
GRI, established in 1997, provides a globally applicable standard for disclosing the impact of a company's operations on the environment, economy, and people. SASB takes a financial materiality approach to sustainability reporting, with a sector-specific focus on the financial effects of ESG factors on a company. The organizations are collaborating to align their disclosure frameworks and standards, but no matter which framework is used, insurance companies should consider ESG reporting frameworks as foundational in their transition to a low-emission economy as they will help identify both opportunities and gaps in their current Environmental, Social, and Governance structure.
TCFD + CDP
Two initiatives are leading efforts to promote climate-related financial disclosures by businesses: the Task Force on Climate-Related Financial Disclosures (TCFD) and CDP (formerly the Carbon Disclosure Project).
TCFD has gained official endorsement from the EU and has been adopted in various regulatory requirements around the world, while CDP has established a standardized approach to disclosing corporate carbon emissions across industries. These disclosure frameworks help insurance companies understand the financial impact of climate on their organization. Only by assessing and measuring current climate governance, strategy, risk management structure, and metrics and targets, can senior management inform investors, lenders, insurance underwriters, and other stakeholders about how the company tracks and manages climate-related risks and opportunities.
GHG Protocol
The Greenhouse Gas Protocol (GHG Protocol) is the main standard for greenhouse gas accounting and comprehensive calculation guidance.
As the saying goes, you cannot change what you do not measure. However, until recently, there has not been a globally recognized standard for measuring and reporting emissions related to insurance underwriting portfolios (insurance-associated emissions). Therefore, the GHG Protocol has worked together with the Partnership for Carbon Accounting Financials (PCAF) to develop the Global GHG Accounting and Reporting Standard for Insurance-Associated Emissions, which is pending official GHG Protocol review and approval.
SBTi
Once an insurance company has established its GHG inventory it may consider taking the next step and setting Science Based Targets (SBTs) to reduce its emissions and finance/insurance-based emissions to net-zero, thus aligning with the Paris Agreement target of Net-Zero global emissions by 2050.
The Science Based Targets initiative (SBTi) is a global organization that helps companies and financial institutions set ambitious emissions reduction targets in line with climate science. Its goal is to accelerate the global economy towards halving emissions before 2030 and achieving net-zero emissions before 2050. In April 2022, SBTi published the Foundations for Science-Based Net-Zero Targets Setting in the Financial Sector and began developing a separate Net-Zero Standard for Financial Institutions, publishing an exposure draft in June 2023. The SBTi Financial Institution Net-Zero Standard will provide guidance and tools to help financial institutions set net-zero targets that consider their financed emissions. This standard will provide guiding principles, a definition of net-zero for financial institutions, metrics, and target formulation considerations such as fossil-fuel financing and the use of carbon credits. The goal is to launch the Financial Institution Net-Zero Standard between Q4 2023 and early 2024.
KERAMIDA is a Sustainability & Climate consulting firm that can help insurance companies with all the above steps. Our professionals can provide expertise on ESG reporting, carbon accounting, climate-related financial disclosures, and SBT target setting. To speak with one of our experts, please contact us or call (800) 508-8034 today.
Blog Author
Jannika Kremer
Senior Sustainability Analyst
KERAMIDA Inc.
Contact Jannika at jkremer@keramida.com
