Insured Emissions and Claims Carbon Footprint

Insured Emissions and Claims Carbon Footprint

Lenders and asset managers have already for some time focused on calculating and reducing greenhouse gas (GHG) emissions across their portfolios. These “financed emissions” are typically much larger than the emissions from a lender’s or asset manager’s direct operations.

The idea is, roughly speaking, that by analysing your financed emissions you acknowledge how you as a lender are participating in causing climate change, and also that you get a better grip on the climate/transition risks in your portfolio.

In a similar fashion some insurers are analysing their “insured emissions”, or the carbon footprint of the companies for which they provide insurance cover. This is an emerging trend within the insurance industry, which so far has mostly focused on steering its vast investment portfolios away from polluting businesses.

An example of recent developments in the insurance industry is the Net-Zero Insurance Alliance (NZIA), consisting of eight leading insurers and reinsurers, which is committing to transition their insurance and reinsurance underwriting portfolios to net-zero emissions by 2050.

In September 2021, The Partnership for Carbon Accounting Financials (PCAF), in collaboration with the NZIA, announced the launch of a working group to develop the first global standard to measure and disclose insured emissions.

In October 2021, the Task Force on Climate-related Financial Disclosures (TCFD)published an update to its implementation guide, in which they recommend that:

Insurance companies should disclose weighted average carbon intensity or GHG emissions associated with commercial property and specialty lines of business where data and methodologies allow.”

For guidance on how to calculate the carbon intensity, TCFD referred to CRO Forum’s 2020 Carbon Footprinting Methodology for Underwriting Portfolios.

What to include in value chain emissions?

It seems clear that going forward, more and more insurers will be analysing and disclosing their insured emissions. These disclosures, combined with meaningful reduction targets, will be a crucial contribution by the insurance industry in hastening our global journey towards net zero.

But should the insured emissions be treated as part of an insurer’s value chain (scope 3 emissions)? This might sound as an irrelevant technical question, but it will have a significant impact on how numbers and targets are treated in practice, as everything needs to go according to established frameworks and standards.

For a long time financed emissions have been treated as indirect scope 3 emissions, falling under category 15 (“investments”) in the GHG Protocol – the de facto framework for measuring and managing GHG emissions from operations and value chains. 

There is, however, not a category for insured emissions in the GHG Protocol and comparing insured emissions with financed emissions is like comparing oranges with apples. When you finance a business, you can think of it as obtaining a share of the business and therefore also a share of the emissions, whereas when you insure a business, it’s mainly a matter of transferring risk.

As important as it is to understand insured emissions, we would argue that these should not be treated as part of an insurer’s scope 3 emissions. What should, in fact, be treated as scope 3 emissions (under category 11, “use of sold products”) are emissions arising from insurance claims settlement, which we are calling the claims carbon footprint.

Each time an insurer fixes something that gets broken or destroyed, there will inevitably be a carbon footprint associated with the event. According to our estimate, about 1% of all global CO2e emissions arise from cars and properties repaired by insurers.

The insured emissions and the claims carbon footprint complement each other fittingly. The insured emissions are relevant for commercial insurance (where you are insuring a company) and the insured emissions are mainly a question of disclosing which type of companies and industries “you are willing to do business with”. The claims carbon footprint, on the other hand, works across both retail and commercial insurance and only focuses on the actual footprint of the insurance product itself.

Example: insurance customer in the mining industry

When looking at a mining company from an insured emissions perspective, it’s clear that the underwriting carbon intensity is high. The insurance premiums would typically be high and a mining company will produce significant scope 1 and scope 2 emissions. 

Deciding what types of risks should be underwritten is important, not just for climate reasons but also for regulatory and branding reasons. However, the mining company’s scope 1 and scope 2 emissions should not be seen as part of an insurer’s scope 3 emissions. Doing that would lead to double counting of emissions. 

The same mining company might have a fairly low claims carbon footprint, as this will consist of the emissions associated with repairing the expected amount of claims for the customer. These repair related emissions are clearly a part of the insurer’s scope 3 emissions, and are also relevant for climate disclosures in order to understand the transition risk and opportunities of insurers. 


The insurance industry needs to accelerate its climate efforts, which in turn will require a broader and deeper understanding of climate related risks and opportunities. 

So far, most of the industry’s work around GHG emissions has focused on direct operations and investment portfolios. Next, insurers should establish baselines for their underwriting portfolios and supply chains, in which claims settlement plays a crucial role.

What is treated as an insurer’s scope 3 emissions is relevant, because most frameworks and standards accentuate the need for disclosing indirect emissions arising from the value chain.

Calculating the correct baselines and understanding how different parts of an insurance business fit into established sustainability frameworks are crucial first steps for being able to set science based reduction targets and thus contributing with meaningful climate action. 

In the TCFD framework there is room for both insured emissions and claims carbon, as they shed light on different aspects on what is needed in order to reach net zero.

Image credit: Chris Leboutillier @ Unsplash