New sustainability agenda for insurers
The European Commission has recently adopted the final delegated act of the European Sustainability Reporting Standards (ESRS), which will require all companies subject to the Corporate Sustainability Reporting Directive (CSRD) to disclose information on their environmental, social and governance (ESG) performance and impact. This will have significant implications for P&C insurance companies, as they will have to report on their material climate impact throughout their value-chains.
What are the ESRS?
The ESRS are the sustainability reporting standards that underpin the CSRD, which has been in force since January 2023. The aim of the CSRD is to bring sustainability reporting on par with financial reporting, by ensuring that investors and other stakeholders have access to reliable, comparable and relevant information on the ESG performance and impact of companies.
The ESRS covers disclosures on the full range of ESG issues, including climate change, biodiversity and human rights. They are based on technical advice from the European Financial Reporting Advisory Group (EFRAG), an independent body bringing together various stakeholders.
The standards are tailored to EU policies, while building on and contributing to international standardization initiatives. The Commission adopted the ESRS on 31 July 2023, after a four-week public feedback period on a first set of draft standards.
What does it mean for P&C insurers from a climate perspective?
ESRS will require climate disclosure on the total emissions footprint of an insurance company, reduction targets and actions/levers that will help achieve them, management of risks and opportunities arising from climate change, and financial impacts of these risks and opportunities on the company. In the reporting requirements, climate change is considered material to every reporting entity, unless it can provide an explanation showing otherwise.
Specifically, under the E1 standard, the mandatory disclosure requirement of Scope 3 emissions is an ambitious step towards European decarbonization endeavors. The standard states:
“Gross Scope 3 GHG emissions as required by paragraph 41(c) is to provide an understanding of the GHG emissions that occur in the undertaking’s value chain beyond its Scope 1 and 2 GHG emissions. For many undertakings, Scope 3 GHG emissions may be the main component of the GHG inventory and are an important driver of the undertaking’s transition risks.”
A key question is which of the 15 Scope 3 categories in the GHG Protocol are material for the insurer. Fortunately, the concepts of Double Materiality and Value Chain as covered by ESRS standards provide significant clarity.
In short, combining both concepts means that a sustainability matter becomes material for an insurer when it causes short to long-term impact on people and the environment (besides affecting the financial health of the insurer itself) as a result of its operations and value-chain.
To summarize, ESRS will affect insurance companies in several ways:
Requiring them to report on their Scope 1 and 2 emissions using a market-based approach.
For Scope 3 emissions, insurance companies will have to report on the following categories: purchased goods and services; use of the sold insurance products; capital goods; fuel- and energy-related activities; upstream transportation and distribution; business travel; and employee commuting.
Requiring them to report on their climate-related risks and opportunities, using a scenario analysis based on at least two scenarios: one aligned with the Paris Agreement’s goal of limiting global warming to 1.5 °C and well below 2°C above pre-industrial levels; and one reflecting current policies and actions.
Requiring them to report on their climate-related targets and strategies, as well as their governance structures and processes for managing climate-related issues.
Why is this important?
The ESRS will help investors and other stakeholders to assess the sustainability performance of insurance companies, as well as their exposure to climate-related risks and opportunities. This will, in turn, create a culture of transparency and accountability among insurance companies, encouraging them to align their activities with the EU’s climate goals and policies.
Moreover, the ESRS and the CSRD will reduce reporting costs for insurance companies over the medium to long term, by harmonizing the information that needs to be provided. They will also ensure a high degree of interoperability between EU and global standards like GRI and IFRS, preventing unnecessary double reporting by companies.
How to prepare?
Increased focus on Scope 3 value-chain emissions introduces a significant change to P&C insurers, as they now also have to assess the climate impact from the actual business itself, namely the emissions that stem from insurance products and claims handling.
Insurance companies should start preparing for this change by collecting data on their ESG performance and impact, reviewing their climate-related risks and opportunities, and developing their climate-related targets and strategies. By doing so, they will not only comply with the new reporting requirements, but also enhance their reputation, competitiveness and resilience in a changing world.
At Claims Carbon, we focus on the emissions that stem from the actual insurance business, i.e. insurance and claims, as they comprise a significant part of an insurer’s value chain, including the customers, suppliers involved in claims handling, and materials and activities used to repair/replace insured assets.
Please reach out to us if you’d like to discuss further how to prepare for CSRD and how you can measure and obtain detailed analytics on the emissions that stem from the actual insurance business.
