Making sustainability reporting fit for the insurance sector’s future

At a Glance

As the world transitions to a greener economy, insurers as institutional investors may see diminishing returns, writes Atos’ Ben Murphy. The companies that act now, enrich their data, communicate it meaningfully, and stress-test their portfolios are the ones most likely to flourish.

4 Minute Read

Ben Murphy

Director for Digital and Innovation in Financial Services, Atos

Evolving ESG ratings

At the same time, reporting and compliance frameworks are evolving. Regulatory requirements are increasing in line with government, stakeholder and public demands for action on sustainability across all sectors. Aligned with this, Environmental, Social and Governance (ESG) reporting and planning is becoming a greater area of focus. ESG ratings are those intangible factors to which a relative risk factor can be assigned.

While ESG has gained traction, it remains relatively subjective; methods, factors and weightings vary by agency. However, irrespective of ESG rating consistency, its methods are shaping a private investor market and fiduciary duties. Those organizations with progressive ESG strategies are shown to have lower relative risk factors, and there is a trend to ESG-based investing.²

²_{ESG and Credit Rating Correlations Report}

Climate-Related Financial Disclosures

However, there is a long way to go to reach anywhere near the global community’s net zero targets. Investors and their stakeholders are increasingly looking to do good with their money – and that requires a commonly agreed set of criteria for investment decision-making.

The granularity, integrity and objectivity of reporting criteria and measurement will undoubtedly increase in the coming years. It is Climate-Related Financial Disclosures that will expose the emerging financial risks. The Task Force on Climate-Related Financial Disclosures was created to develop consistent climate-related financial risk disclosures as information for stakeholders. There are areas in which more transparency is required. For example, if a company reports its carbon disclosure, there needs to be a way to calculate, in a transparent way, the costs of offsetting that carbon.

New opportunities, with concerted action

While there are challenges for insurers, these shifts also create major new investment opportunities, for instance in renewable energy and the coalescence of entirely new ecosystems that support a decarbonized economy. There is the chance now for visionary investors to get ahead.

As consumer education matures and drives demand for more sustainable business, so too will data.

Atos has been working with financial services operations to measure carbon in an understandable and actionable format. This about showing carbon impacts in a meaningful way for concerted climate action – and that means not just financial drivers. We’ve been developing dashboards as the means to involve different stakeholder groups, for example engaging financial services customers more directly to dramatically reduce their use of paper.

Stress testing portfolios

We’re also helping businesses leverage data to understand the climate-related risks within their investment portfolios; for example, capabilities to run 50 different investment bonds through analysis to assess sustainability, with a clear view of the actual versus necessary trajectories to meet decarbonization goals.

Just as insurers conduct climate catastrophe modelling for the liability side of the business, they need to do the same for climate-related financial risks related to their financial portfolios. In other works, taking climate scenarios data and using this for modelling and stress testing.

Data to fuel ethics

The ability to use more sophisticated analytics will bring more objectivity and integrity to inform investors more clearly on ‘what good looks like’ and to drive globally ethical funds. Data is the essential resource for pinpointing climate-related financial risk. And it is the fuel for enablers such as AI and blockchain that will enable insurers to better respond to that risk. Major financial institutions are aware of this, with Moody’s launch of the Moody’s ESG360™ ESG analysis platform³ and the Financial Stability Board’s wide ranging research into the availability of data with which to monitor and assess climate-related risks to financial stability.⁴

³_{Moody’s Launches New Platform to Deliver Comprehensive and Actionable ESG Data and Insights}
⁴_{The Availability of Data with Which to Monitor and Assess Climate-Related Risks to Financial Stability}

Key Takeaway

A joined-up approach to climate risk is still evolving; the insurance sector as a whole is still to arrive at a consensus around how best to approach it. Those companies taking a proactive approach now will benefit through an ability to continuously mature and iterate their data. What’s clear is that climate-related financial risk is a critical business issue; one that will have a major influence on which insurance providers flourish in the future and which may flounder.