Growing demand for climate reporting requires insurers to learn not only about their own emissions but also about those of their insured clients. Amy Barnes, head of sustainability and climate change strategy, Marsh, explores the potential impacts of climate reporting on third parties working with insurers and the clients they serve.
Lessons from cyber risk management
When the insurance industry began to write standalone cyber risks, each insurer came up with their own list of information they wanted to get from clients. This led to a situation in which clients had to answer, potentially, over 300 different questions to complete their programme with multiple insurers – an unnecessarily high-friction experience. There is a danger that a similar dynamic develops in relation to climate and sustainability data.
Aligning ESG data requests
As insurers focus on achieving their net zero targets and broader sustainability objectives, they will likely start to ask clients to provide more and more data, potentially leading to similar frictions and duplicate data demands. This burden could be minimised by aligning client data requests around a common framework.
Given that the industry is at a relatively early stage of assessing what to measure, there is still an opportunity to align around such common framework. In a survey of 30 UK-based insurers conducted by Marsh recently, only 38% said their underwriting models or rating tools already consider ESG factors – but every single one said they expect ESG factors to play a bigger role in underwriting in the future.
A question of good data
A big part of the problem is that many insurers are still struggling to understand what data they should seek to collect.
Standardised ESG disclosure frameworks exist, though they are still far from perfect – and if insurers use them to ask clients for information, they often cannot explain to the clients what they intend to do with it.
Most insurers have not established how to relate ESG information to their underwriting outcomes or use it to assess risk.
There may also be big gaps in the availability and reliability of data that is required from third parties.
Towards net zero
For example, on the question of emissions, almost 30 insurers have now joined the UN-led Net-Zero Insurance Alliance. Other non-members have also made some kind of commitment to pursuing net zero – whether that means scope 1 (emissions you produce), scope 2 (also emissions from the energy you use), or scope 3 (including everything upstream and downstream).
We can expect these varying commitments to result in insurers seeking additional information on their insureds, whether this is procured from third parties or requested as part of disclosure.
Many large companies will already be collecting and publishing emissions data that is in the public domain and that would be relatively easy to share with insurers. Clients in energy-intensive sectors, such as steel or cement, will likely be especially keen to actively disclose their data rather than have the information procured from third parties – which may be out of date.
Similarly, companies that are proud of their ESG performance may want to proactively disclose ESG information if it could lead to more attractive terms. In our survey, 79% of UK-based insurers said they expect to offer some kind of incentive for clients that could demonstrate positive ESG ratings.
A sector-based approach
But smaller businesses, and those in less energy-intensive sectors – say, smaller professional services firms or education – may not currently be collecting data on their own emissions yet. They may prefer insurers to estimate their emissions from publicly available data or proxies.
From a client-centred perspective, it makes sense for the industry to proactively seek alignment on these issues while the agenda is still at an early stage.
Insurers are right to increasingly seek to understand, assess, and improve their performance on climate and relevant sustainability metrics – and aligning around a common framework will mean they can do so without creating unnecessary new frictions for clients.
Moving from ESG to impact, an even bigger challenge
The challenge becomes even more complex when addressing impact – while many elements of ESG information focus on internal activities, a shift to assessing the external impact an organisation makes will add another information dimension.
Putting clients first
As industry thinking about climate and sustainability information evolves, the impact on clients must be our first consideration. Many insureds are frustrated by the lack of clarity on what information they should be sharing and, more importantly, how that information may ultimately be used. The sooner we can answer the questions the better the client engagement we can expect.
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The author is head of sustainability and climate change strategy at Marsh. The views expressed are the author’s own.
Amy Barnes participated in an expert panel discussion on insurance climate disclosures. Insurance Climate Disclosures – present state and future outlook, is a collaboration between Solvency II Wire, Royal London Asset Management and Slaughter and May, bringing together senior regulators and industry figures to discuss the challenges of ESG reporting in the insurance industry.
Insurance Climate Disclosures: present state and future outlook, was held at the offices of Slaughter and May in London, on 14 June 2022.
Articles in the series
- Insurance Climate Disclosures: present state and future outlook, an introduction
- Climate-related risks – a coordinated response to a global challenge, FSB
- Climate change scenario analysis in the ORSA – a key tool for (re)insurers, EIOPA
- Better not more ESG information, FRC
- Managing climate policy uncertainty, Just Group
- Climate and sustainability data quality – an insurance perspective, Marsh
- Shining a light on the Path to Sustainability, RLAM
- Position paper: Conflicts of climate disclosure
- Media Release: Insurance Climate Disclosures – present state and future outlook
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