The Insurance Climate Change Conundrum – Operational Risk and ESG Reporting

In 2023, PwC and the Centre for the Study of Financial Innovation (CSFI) released their Insurance Banana Skins Report, scoring the top risks facing today’s Insurance Industry. We are reviewing five of these risks that we see our clients concerned about. This article is the fourth in the series. Read our other’s here: Regulation, Technology, Interest Rates, AI.

Climate change is no longer a distant threat but an urgent reality. As increasingly devastating wildfires and fierce storms rage across the globe, environmental disasters are becoming common place occurrences in our lives. In response, regulators have worked to mitigate the growing threat and safeguard the future through a veritable alphabet soup of regulations and frameworks. CSRD, SFDR, SBTI, SDR, TCFD, to name a few, have similar underlying goals. However, the complexity and nuances between regulations including calculations of KPIs, access to underlying data, and required disclosures provides a unique challenge for practitioners as effective dates march forward.

It shouldn’t come as a surprise that in last year’s PwC Insurance Banana Skins report, insurers reported climate change as one of the top industry risks, closely behind cyber risk and regulation. While property and casualty and reinsurance are more directly impacted than life, the industry as a whole recognises the importance of accurate reporting, the role of governance in addressing climate risks, and the need for transparency across forthcoming regulatory changes.

Operational Risk

In response to climate change, property and casualty as well as reinsurance companies have experienced an increasing frequency of what were previously identified as secondary risks. Growing claims as a result of natural disasters increase underwriting risk and the burden of pricing policies to insure more vulnerable assets. With the rules of the insurance industry changing in the face of climate change, companies must reassess traditional approaches to risk management. As regulatory regimes become effective, the transition to reporting on climate related activities and commitments to net-zero necessitate a new perspective. An alphabet soup of regulatory frameworks, insufficient risk management tools, and a lack of available, transparent data further exacerbate the challenges faced across the industry. It’s also imperative to look across the business, as there isn’t one function that bears the weight of climate change alone.

The burden of complex regulatory reporting requirements is especially felt by risk, compliance, finance, and investment teams. Complete, accurate and transparent data is an area the industry struggles to align on. Multiple vendors provide disparate ESG (Environmental, Social, and Governance) data and rating scores based on proprietary methodologies – with no clear indicator of when an industry standard will arise. Standardisation and transparency in ESG data and reporting methodologies will be essential for long-term climate change guidance as the industry faces a new norm.

There is help at hand though. To address these concerns, we have seen a specialised three-tier market strategy emerge:

1. Specialised consulting and law firms, offering objective guidance, identifying, and quantifying climate-related threats. This includes incorporating business resilience into corporate strategies and embracing the opportunities presented by a low-carbon economy.
2. Specialised technology is helping to capture, consume and report on climate related data, to increase transparency and increase the understanding of current risk, future risk and the how to capitalise on investment opportunities as more green portfolios emerge, and investors express interest in investments that align with their environmental values.
3. Specialised expertise and roles across the insurance industry are aiding in the production of climate-related financial disclosures, assessing liability exposure, supporting compliance with environmental regulations, developing due diligence frameworks, and identifying growth opportunities.

Regulatory Reporting 

Regulation on climate change, and more broadly ESG has certainly been in the spotlight this year, with ESG investment reporting topping the chart of changing regulatory guidance. As recently reported in the FT Adviser, Colin Clunie, Clearwater’s Head of European Operations calls out there is no shortage of regulatory reporting in the space – but ESG reporting provides new challenges due to its ambiguity.

The good news on ESG reporting, is that the regimes themselves have more in common, than they do in disparity. Take the Corporate Sustainability Reporting Directive (CSRD) for instance. CSRD mandates companies to report on the impact of their corporate activities on the environment and society. According to Deloitte, “Approximately 50,000 companies are expected to be caught by CSRD, and the first companies will have to apply the new rules as early as 2025 for financial years beginning on or after January 1, 2024.”[1] CSRD presents challenges and opportunities related to double materiality assessments, setting targets, disclosing vast amounts of information, providing assurance, and integrating sustainability knowledge, but it also requires alignment with European Taxonomy and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). As the regulators get to grips with what’s needed for ESG reporting, we may see the individual regimes merge, and a more holistic governance approach come in to play.

So where does that leave insurers for their regulatory requirements? It’s back to investing in the three-tier market – bringing together the right partners, technology, and expertise to find the opportunity in change.

The global response to climate change will continue to gain momentum, driven by the need for accurate reporting, robust governance, and regulatory changes. As Europe leads the way, businesses should anticipate similar regulatory regimes to emerge globally in the next 3-5 years. Transparency in ESG data and ESG reporting, alignment with reporting regimes, and the ability to manage climate risks across investment portfolios are crucial for businesses to navigate the challenges and seize the opportunities presented by how our planet and social attitude toward climate change is evolving.

[1] Corporate Sustainability Reporting Directive | Deloitte UK