Challenges and opportunities for insurers around net zero

The coming few years will be challenging for insurers as they try to navigate emerging standards and expectations around the world’s markets when it comes to net-zero targets, but at the same time, the commercial opportunities from this new environment are expected to grow. This is according to panellists on the latest webinar from Standard and Poor’s, Future Directions In The Race To Net Zero.

As policymakers, regulators and activists around the world continue to push the CO2 reduction agenda, there are challenges around mandatory reporting and disclosure requirements in the short term, the webinar heard.

Nigel Brook, partner at the law firm Clyde & Co, said the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) framework for promoting informed investment, credit, and insurance underwriting decisions is the gold standard globally, adding that it is being adopted as the basis of mandatory disclosure regimes in many markets, especially the UK and Europe.

Miqdaad Versi, partner at consultants Oxbow Partners, said that insurers are responding to compliance differently, with some taking a minimal ‘tick box’ approach whereas others consider it an integral part of their strategy planning. “Overall, we see a direction of travel whereby the standards around disclosure and reporting will keep growing,” he said.

Ryan Bond, head of climate and sustainability insurance innovation at Marsh agreed that climate-related financial disclosures are moving up insurers’ agendas, but it is not yet clear how they will influence underwriters’ risk appetite. He said insurers must start engaging more closely with commercial clients to get a better understanding of how their future relationships might be impacted by climate risk disclosures, and that how well insurers communicate their intention will be paramount.

S&P noted that despite a number of insurers quitting the UN-convened Net Zero Insurance Alliance (NZIA), and the group removing member obligations to set net-zero targets and publish their progress, insurers are staying focused on net zero.

Bond said that despite exaggerated and well-publicised anti-ESG rhetoric from several US state attorneys general, there has been no slowdown in the number of requests from clients for advice on improving sustainability performance. Equally, insurers around the world will not loosen their focus on net zero as a big part of underwriting decision making, he said.

Rachel Delhaise, group head of sustainability at Convex Insurance, agreed by stating that more state regulators in the US are implementing NAIC coordinated disclosure surveys aligned with TCFD.

Brook said insurers active in Europe need to gear up for yet more sustainability-related compliance, noting the Corporate Sustainability Reporting Directive (CSRD) which came into force in January 2023 and expands the scope of the non-financial reporting directive.

CSRD extends beyond the TCFD since it creates ‘double materiality’, Brook said. Insurers will have to report on the impact they are having on the environment as well as the environmental risks they face, and it applies right across the value chain and will be phased in by company size by 2029. The new rules will apply not only to EU companies but any company doing business in the region.

The concept of materiality is important, said Versi, as it could force insurers to gather more data from insureds around their emissions, for example, and it follows that insurers will then take on a stewardship role in the wider economy. While generating more work for insurers, CSRD could potentially lead to new opportunities, he said.