ClimateWise: Majority of insurers improving climate and nature risk management

By Rebecca Delaney

Feb 5 - (The Insurer) - Members of ClimateWise, a global environmental initiative for the insurance industry, have demonstrated a "generally strong" approach to incorporating climate and nature into underwriting at a high level, although average scores declined in the 2024 review as a reflection of higher benchmark standards.

Facilitated by the University of Cambridge's Institute for Sustainability Leadership, the latest review marks the 16th year of reporting against the ClimateWise Principles disclosure framework.

ClimateWise updated its climate reporting principles for insurers in June last year to include the Task Force on Nature-related Financial Disclosures and the Corporate Sustainability Reporting Directive, as well as disclosure requirements under the International Sustainability Standards Board and the UK's Transition Plan Taskforce.

As noted in the review, the new principles have a broader scope and higher benchmark standards, which led to a re-baselining of scores.

Therefore, although the majority of members saw a "significant" improvement year on year in their approach to climate and nature issues, the average score dropped as a reflection of the new, ambitious and expansive requirements.

Under the principle of "enabling transition", 2024 marked the first time that members were required to explicitly consider their investment and underwriting portfolios separately.

GRAPHIC "Enabling transition: score range by sub-principle"

Members with in-house investment activities saw "noticeably" higher scores (Zurich was noted for having clear strategic asset allocations informed by climate analysis and portfolio segmentation), with ClimateWise identifying scope for others to engage with outsourced investment management and hold asset managers to account on climate- and nature-related topics.

"Scores for underwriting reflect a broadly industry-standard approach to modelling, with some outliers in terms of the development of bespoke models: members’ approaches to encouraging policyholder behaviour range from those that have not yet considered using their approach to underwriting to support decarbonisation, to those that have a detailed approach highly integrated into the pricing and product development," said the report.

Examples from specific carriers included Inigo's introduction of clauses to encourage more sustainable rebuilds, while RSA demonstrated efforts to understand its clients' transition plans and environmental management measures.

"While there is a generally strong approach to underwriting at a high level, many members could consider improving by putting in place differentiating processes for different product segments, business divisions or geographies," the report continued.

"A number of members have started to explore the implications of calculating insurance-associated emissions and are seeking to address the associated data challenges. Progressing in understanding the carbon footprint of their portfolios will depend on the judicious use of proxy and third-party data to move from analysis to decision-making."

GRAPHIC "Steering transition"

The "steering transition" principle requires members to take a top-down, strategic view of climate and nature risks to integrate into business models. Under the governance sub-principles, the board and senior management should assume oversight of climate- and nature-related risk and opportunity management, including any transition plans.

Members must create a clear link between governance and oversight, while ensuring that the board and senior management have the required knowledge to incentives to oversee risks and establish a culture of awareness around environmental issues. The report acknowledged Convex for giving clarity over reporting lines and reporting frequency, with Axa XL adopting a compensation policy designed to align employee interests with the overarching sustainability strategy.

"Steering transition" also includes sub-principles related to strategy and risk management, with members required to describe the impacts and implications of climate- and nature-related risks and opportunities on their business model, performance, strategy and decision-making.

Members must also describe the outcomes of their materiality analysis -- Allianz and Beazley were highlighted for having carried out strong double materiality assessments that demonstrated a strong link between climate and strategy but, overall, strategy was described as "relatively nascent", with some yet to complete materiality analyses or develop resilience plans.

"Overall, ClimateWise members have recognised the importance of expanding on their existing approaches to governance and are now considering how to incorporate nature and biodiversity topics within the governance frameworks," said the report.

"It is generally easier for organisations to describe management responsibility than board accountability, and there is still work to do in respect of formalising much of the approach to governance, in particular ensuring that organisations have the right knowledge and incentives in place."

It added: "While members are generally strong at identifying risks, there is less clarity over the business case for change and how these assessments feed into the decisions they make. Generally, insurer members provided strong descriptions of how the risk management control cycle was being applied to climate risk, and could confidently demonstrate the adoption of climate risk into risk universes and taxonomies."

GRAPHIC: Engaging stakeholders

The review found that ClimateWise members have generally taken a "highly active" role in involving their employees when addressing climate change under the "engaging stakeholders" principle.

The operations sub-principle requires members to manage the environmental impacts of their internal operations and physical assets under control, while the value chain sub-principle relates to disclosure of sources of emissions and adverse climate- and nature-related impacts on the upstream and downstream value chain.

Members are also recommended to encourage suppliers to improve the environmental sustainability of their products and services, as well as undertaking research to inform current business strategies and develop new products.

"Given the challenges of translating real-world interactions with the value chain into a financial services context, ClimateWise members show an impressive approach to understanding and interacting with their value chains in order to improve environmental sustainability of the insurance industry as a whole," said the report.

"Research remains one of the key areas of focus for ClimateWise, alongside disclosure and convening, and members regularly collaborate on impact-orientated research."

GRAPHIC: Disclosing effectively

The fourth and final ClimateWise principle of effective disclosure is increasingly in focus amid a growing trend of bringing climate and sustainability disclosures in line with financial disclosures in terms of reporting processes and oversight.

Members are encouraged to determine the most meaningful metrics for them and the users of their reports, with the review declaring that members generally have robust and "well-thought-out" approaches to measurement and target setting evidence - although it added that some may benefit from formalising their reporting procedures with details of controls in order to flesh out the end-to-end process.

"The 2024 ClimateWise principles have significantly raised the bar for members. After a year of major change, aligning to new frameworks, and developing new standards and guidance, there are fewer major changes on the horizon," the report concluded.

"Next year, members will be asked to comment on their transition plans; these sub-principles have already been developed and some members have chosen to voluntarily report against them this year. This stability will give ClimateWise members a base from which to demonstrate continuing improvement against the ClimateWise principles."