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
As the world transitions to a greener economy, for insurers, as institutional investors, the returns on investment that exist in a high-carbon economy may well diminish. Companies will feel the financial impact of climate change through transition and impact risk resulting from changing legislation and more sustainable investment.
The United Nations has identified transition risks and estimated that, on average, portfolios will be negatively impacted by around 13%.1 If climate-related risks go unmanaged, then Boards will feel the heat of climate change in the form of lower returns, growth and valuations.
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
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
Digital Insurance – Further Insights
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