What gets measured gets done! But what if the metric that needs measuring is not clear and there are no proven methods to measure it?
Broadly speaking, this is the state of climate risk reporting and disclosure today. We know we need to take action to tackle climate change, but we also know that without measuring it properly we are unlikely to get adequate results and have the ability track our progress.
As the TCFD so succinctly put it: “Without reliable climate-related financial information, financial markets cannot price climate-related risks and opportunities correctly, and may potentially face a rocky transition to a low-carbon economy.”
Regulators and standard setting bodies in Europe and across the world are (mostly) awake to this challenge and are progressing with active programmes to develop and require climate-related reporting and disclosures, putting increasing pressure on companies to report more climate related information. This pressure is compounded by client and stakeholder demands for data as they themselves require that information. But how can this be done in a meaningful and decision-useful way, when there is little consensus not only on what metrics should be used, and methods for measuring them are still being developed?
It is this paradox that guided the debate in the panel discussion Insurance Climate Disclosures: present state and future outlook.
The event, and subsequent volume of articles published here is a collaboration between Solvency II Wire, Royal London Asset Management, and Slaughter and May, which brought together senior regulators and industry figures to discuss the challenges of ESG reporting in the insurance industry.
List of participants at the event
Mark Babington, executive director, regulatory standard, Financial Reporting Council (FRC)
Amy Barnes, head of sustainability and climate change strategy, Marsh
Sonia Boulad, member of the secretariat and working group on climate risks lead, Financial Stability Board (FSB)
Roshan Lachman, financial risk director, Phoenix Group
David Rorrison, director of enterprise risk, Just Group
Manav Verma, group external reporting director, Aviva
Justin Wray, head of policy, European Insurance and Occupational Pensions Authority (EIOPA)
Robert Chaplin, partner, Slaughter and May
Andrew Epsom, insurance client solutions director, Royal London Asset Management
Gideon Benari, editor, Solvency II Wire
Insurance Climate Disclosures: present state and future outlook, was held at the offices of Slaughter and May in London, on 14 June 2022.
The challenges of climate risk disclosure
As we note in the position paper, Conflicts of climate disclosure, published for the event, disclosure challenges extend beyond reporting itself as organisations must balance the costs and benefits of obtaining the data, set appropriate risk management targets and consider multiple time horizons, some of which may extend well beyond the life span of policyholders.
In this context we refer to information in the broader sense, rather than strictly relating to data, as the former encompasses not only figures but also decisions and considerations that will feed into the production and use of the disclosures. For example, balancing competing objectives such as any views on potential trade-offs between climate risk management and financial returns.
To help explore this vast and somewhat nebulous topic we frame the discussion around three broad themes:
1. Creating and sourcing climate disclosure information
2. Reliability and credibility of the information
3. Usability of climate information
We also make a distinction between the producers of climate information and disclosures, and those who consume it. In practice, many organisations will perform both roles. For example, insurers rely on external sources to complete and publish their portfolio emissions that is then used for their public disclosures. That information could be used by regulators or data providers to create geographic or sector-specific climate analysis.
The articles in the series touch on many of the themes outlined above. The position paper Insurance Climate Disclosures: present state and future outlook, expands on the three themes above and forms a good introduction for framing the debate.
The first articles in the series are by participants from the three regulatory and standard setting bodies. In Climate-related risks – a coordinated response to a global challenge, Sonia Boulad, member of the secretariat and working group on climate risks lead, FSB, outlines the role of the FSB in coordinating global climate initiative efforts and introduces the FSB’s Roadmap for addressing Climate-related Financial Risks.
A deeper dive into the insurance world and the use of the ORSA (Own Risk and Solvency Assessment) is provided by Justin Wray, head of policy at EIOPA. Climate change scenario analysis in the ORSA – a key tool for (re)insurers argues that the ORSA can, and should, be an effective tool at the core of insurers’ climate risk management strategy.
The section concludes with, Better not more ESG information, by Mark Babington, Executive Director, Regulatory Standards, FRC, cautioning that the temptation to provide ever more ESG information must be tempered with consideration of its usefulness for effective decision making and making the case for creating global ESG reporting standards.
The first of three industry perspectives is provided by David Rorrison, director of enterprise risk at the UK insurer Just Group. In his article, Managing climate policy uncertainty, he argues that government policy set with best intentions to reduce carbon emissions may falter if not thought through properly.
Using examples from the residential mortgage lending market, the article shows how missing historical data and a lack of clarity from government limits a lender’s ability to comply with future energy efficiency targets of a mortgage portfolio.
Climate and sustainability data quality – an insurance perspective, by Amy Barnes, head of sustainability and climate change strategy at Marsh, explores the potential impacts of climate reporting on third parties working with insurers and the clients they serve.
The series concludes with the perspective from the asset management industry. Andrew Epsom, insurance client solutions director at Royal London Asset Management discusses the merits of balancing both quantitative metrics and qualitative assessments in addressing climate challenges disclosures.
The path forward
The Insurance Climate Disclosures: present state and future outlook event and the publication of the article series take place in the shadow of a growing swell of anti-ESG sentiment. While it is in part clearly politically and ideologically motivated, claims of greenwashing and lack of transparency in how ESG indices and metrics are constructed are valid critiques that should be taken seriously.
The discussion and the articles in the series highlight some of the challenges facing the insurance industry in particular, and society as a whole, while outlining the global initiatives and paths forward in climate-risk disclosures and reporting. It is hoped they will contribute to the growing body of knowledge and our understanding of how to construct and use effective climate disclosure metrics.
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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