Position paper: Conflicts of climate disclosure • Solvency II Wire

Insurance Climate Disclosures present state and future outlook header

The seemingly inexorable rise in the demand for insurers to provide climate-related information – both publicly and internally – alongside growing regulatory requirements are creating new pressures and challenges for the industry.

At its core lies the conflict between the need to provide climate disclosures that are clear, comprehensive, high-quality and timely, when climate metrics and their interpretation are still in their infancy. This places both the industry and regulators at a unique moment in time when all are trying to make sense of the information and how to best provide, regulate and use it.

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.

Discussion Themes

1. Creating and sourcing climate disclosure information

The challenges relating to data sourcing are interlinked with processes and considerations of the organisations producing the data.

For producers the challenges range from data coverage gaps, defining organisational needs, reaching internal consensus, balancing competing objectives, as well as selecting relevant information to disclosure and where and how to disclose it (e.g. in the annual report or TCFD report).

Consumers of the disclosures face many of the same challenges, including unpacking and understanding the decisions used to create the information.

2. Reliability and credibility of the disclosures

Obtaining reliable and credible data affects both producers and consumers of the information. Whether it is internal information used to produce disclosures or externally sourced data used for analysis (e.g. forward-looking scenarios or sensitivity analysis), unreliable data could lead to wrong outcomes and affect decision making. It may also inadvertently lead to “greenwashing”.

Challenges include using and creating consistent frameworks, consistency over time, the ability to adequately articulate short- and long-term targets, and difficulties relating to third party information and audit.

3. Usability

Producers need to consider how their disclosures are viewed, understood and ultimately used by consumers of the data such as regulators, shareholders and policyholders.

Producers need to consider how to make disclosures user-friendly for both professional and non-professional users (e.g. retail investors).

Both face challenges of incompatibility between information sources and are affected by transparency.

Articles in the series