SBTi publishes a ‘net-zero insurance standard’ industry brief for underwriting portfolios

2023 saw considerable growth in corporate climate action, with companies taking steps to gather and report on emissions data against the backdrop of increasing mandatory climate reporting requirements. While this has helped pave the way for greater climate target setting and action, the landscape has been less clear for re/insurers, particularly as emissions from their value chain (Scope 3) are generally the largest source of emissions which include those within their insurance underwriting portfolios.

In November 2022, we saw the publication of the first global standard to measure and disclose emissions attributable to insurance underwriting portfolios, following collaboration between the Net-Zero Insurance Alliance (“NZIA”) and the Partnership for Carbon Accounting Financials (“PCAF”). This standard was then incorporated into the NZIA Target-Setting Protocol, launched at the World Economic Forum Annual Meeting in January 2023. Since then, however, a number of members have left the NZIA for a variety of reasons. While those insurers that left say their exits will not change their individual commitments to net-zero, the departure of so many of the world’s largest re/insurers has led to fears over fragmentation and the absence of standardization across the insurance market if divergent methods are used to measure and track progress towards net-zero goals.

SBTi december 2023 industry brief

Drawing on its own expertise and foundational work of the NZIA, the SBTi announced via an Industry Brief in December 2023 that it is developing a SBTi Financial Institutions Net-Zero Insurance Standard (Underwriting Portfolios). This is the first step of a lengthy process before any standard is adopted, which will include two rounds of public consultation and subsequent pilot testing. The aim is for the Standard to enable re/insurers to set credible targets using science-based methods, which are recognized and capable of being validated by the SBTi. Reference is made to ‘insured emissions’ – the intention being to include both underwriting portfolio and claims-related emissions.

Details

Key details noted in the Brief are as follows:

• Reference is made to the whole insurance value chain and the extent to which different parts of the chain can influence emissions, noting specifically that further focus will be given to the claims management process.
• A number of existing methodologies (NZIA, SBTi and others) will be evaluated as part of the development of the Standard to ensure that proposals are ‘practical, appropriate in the context of insurance underwriting, scientifically rigorous, and align with the latest science available to meet the temperature goals of the Paris Agreement’.
• Attention will be given to the levers and levels of influence that re/insurers have on real economy actors and individuals, focussing not only on the differences and associated implications between financial (investment and lending) and insurance underwriting, but also differences within the context of insurance itself (treaty and facultative reinsurance having different levels of influence over the insurer and the corporate or retail client within underwriting portfolios).
• As most GHG-emitting and GHG-intensive activities are directly linked to P&C lines of business, it is noted that one potential starting point is ‘emissions footprinting and target-setting efforts on commercial and personal lines of P&C business, particularly where data is more easily accessible’.
• Equally, there is reference to the fact that insurance lines are usually defined by the nature of the risk, and not always the underlying sector or economic activity, such that insured emissions may not apply equally to all lines of underwriting business.
• Whilst there is a summary of three established SBTi methods that link Financial Institutions’ investment and lending portfolios with the objectives of the Paris Agreement to examine how such methods could apply to insurance underwriting portfolios (Sectoral Decarbonization Approach, Portfolio Coverage Approach and Temperature Rating Approach), separate workstreams are ongoing to examine other target-setting metrics and methods.

A step towards standardization

The Brief starts a process of exploring the development of a future SBTi standard for measuring insured emissions (underwriting and claims), with a focus on the role of re/insurers in the economy as providers of financial capacity, risk management and risk transfer solutions.

The content and roadmap in the Brief make it clear that there will be a number of stages and consultations – considerable time and effort is being put into the development of this Standard. There also seems to be a clear appreciation of the role of insurance. For example, how the absence of any capital interest on clients’ activities and assets can impact the influence held over policyholders (as can the length of policy periods and size of the available market) and issues that can arise regarding data availability (particularly for facultative reinsurers).

No guidance is given as to when a Consultative Draft will be released for public consultation, but given the workstreams required in advance, we anticipate that could be some months away. In the meantime, it will be important for re/insurers to keep this is on their radar and consider what feedback they may wish to provide as relevant to their organization and how such methods may work in practice.

Author

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Michelle Radcliffe

Director, Climate and Sustainability, Insurance Consulting and Technology, WTW

email Email phone +44 020 7170 3559

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