Climate Change and Net Zero Target Setting for Insurance Underwriting Portfolio
Climate change is increasingly becoming an important topic in the insurance sector. Many insurers have started disclosing their sustainability initiatives through their sustainability report in recent years. According to the Task Force on Climate-Related Financial Disclosures (TCFD) latest status report, the sector has improved its overall level of climate risk disclosure from 25% to 41% in two years. But that still leaves a significant share of the sector with minimal climate risk transparency.
Regulators in key markets such as the UK, US and EU have proposed rule changes requiring companies to publish transition plans. Insurers, therefore, need to develop credible transition plans — detailing how they expect to adapt their business as the transition unfolds and build the necessary internal capabilities and frameworks needed to deliver against them.
Target setting for climate change in an organisation typically involves identifying specific emissions reduction goals and developing strategies and actions to achieve those goals. This process often begins with assessing the organisation’s current emissions and energy usage and then identifying areas where reductions can be made. The organisation may then set targets for reducing emissions in certain areas.
Insurers have been focussing on greenhouse gas emissions within their operation and establishing ESG criteria for their investment portfolio. However, the emission related to the underwriting portfolio was not a focus for them other than announcing a high-level direction in restricting the underwriting of fossil fuel-related businesses over a period.
Net-Zero Insurance Alliance (NZIA) launched its Target-Setting Protocol, the first-ever global accounting standard to measure greenhouse gas emissions associated with insurance underwriting portfolios (“insurance-associated emissions”) at the World Economic Forum’s Annual Meeting in Davos, Switzerland, on 17th January 2023. The Protocol is developed by the Partnership for Carbon Accounting Financials (PCAF) in collaboration with the NZIA and sets out the recommended approach to target setting and reporting.
NZIA is a United Nations-convened initiative that aims to accelerate the transition to a net-zero emissions economy by leveraging the power of the insurance sector. The alliance comprises insurers, reinsurers, and insurance-adjacent companies committed to achieving net-zero emissions by 2050 or sooner. The alliance's primary goal is to encourage the insurance industry to align its investments, underwriting, and operations with the Paris Agreement's goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels.
Target Setting for underwriting portfolio
Version 1.0 of the NZIA Target-Setting Protocol (the Protocol) will enable NZIA members to independently set science-based, intermediate targets for their respective insurance and reinsurance underwriting portfolios in line with a net-zero transition pathway consistent with a maximum temperature rise of 1.5°C above pre-industrial levels by 2100. With the launch of the Protocol, existing NZIA members are required to set and disclose their initial target(s) by 31 July 2023.
The Protocol outlines five target types within three target categories (i.e., two types within the emissions reduction category, two types within the engagement category, and one for the re/insuring the transition category). According to NZIA, Existing NZIA members will be required to set at least one of the five target types by 31 July 2023 and at least one in each of the three target categories by 31 July 2024. Those joining the Alliance after January 2023 will have six months to set their first target and one year after that to set a target type in each of the three target categories.
This protocol aligns with the SBTi' (Science Based Targets Initiative) Corporate Net-Zero standard for target setting. However, SBT has yet to come out with an exact definition of "net zero" in a financial institution's context (including re/insurance underwriting portfolios). SBTi is currently doing this for the upcoming FINZ Standard.
SBTi has four key elements for net-zero target setting.
Source: https://sciencebasedtargets.org/resources/files/Net-Zero-Standard.pdf
1. Near-term science-based targets are 5 to 10-year GHG mitigation targets within a company’s own value chain in line with 1.5°C pathways.
2. Long-term science-based targets extend the near-term targets towards a residual level in line with 1.5°C pathways by no later than 2050.
3. Beyond value chain mitigation (BVCM), targets are set around actions that will also help others to mitigate their emissions and
4. The neutralisation target requires that any residual emissions must be removed from the atmosphere and permanently stored to reach the net-zero state.
NZIA encourages members to set portfolio target boundaries for the material and relevant portion of their respective portfolios where reliable data is available and the current version of the protocol gear towards near-term targets.
In Summary
Environmental, social, and governance (ESG) is top of mind for many employees and customers of insurance companies. Those for which ESG is important will review insurers’ products and sustainability reports and assess their footprint on the climate. Investors are also increasingly looking for plans to reduce emissions, and regulators are proposing changes requiring companies to publish the transition plans.
Given the importance of transition plans, this protocol gives insurance companies a framework to set targets, start their journey towards a NetZero transition, and be part of the global initiative to reach net zero. The protocol is still a work-in-progress version, which requires further refinement. NZIA and SBT will publish further versions and guidelines over time, making the protocol more robust.
Beyond emission, approaches to integrating Environmental, social and Governance (ESG) into underwriting are also important for insurance companies. Oliver Wyman highlights wider opportunities for insurers in sustainability through a recent report, INSURANCE AND SUSTAINABILITY OPPORTUNITIES FOR 2023.
References:
https://sciencebasedtargets.org/resources/files/Net-Zero-Standard.pdf
https://sciencebasedtargets.org/
https://www.unepfi.org/industries/insurance/launch-of-nzia-target-setting-protocol-version-1-0/
https://www.fsb-tcfd.org/press/tcfd-report-finds-steady-increase-in-climate-related-financial-disclosures-since-2017/
https://unsplash.com/photos/vVHXeu0YNbk