Earlier this month, the Financial Stability Board published its 2021 Status Report on climate change corporate disclosures aligned with the recommendations of Task Force on Climate-related Financial Disclosures (TCFD).

TCFD was set up in 2015 to improve reporting of climate-related financial information and published its 11 disclosure recommendations divided into four thematic areas of governance, strategy, risk management, and metrics and targets in 2017. The 2021 Status Report provides an invaluable insight into how insurers comply with the TCFD recommendations.

The TCFD reviewed 2020 reports submitted by 132 insurance companies of a median size of $29 billion in assets and a maximum size of $1.3 trillion in assets, with business in four lines - multiline, property & casualty, reinsurance, and life & health. Compared to reporting in 2018 and 2019, the percentage of insurers who disclosed the relevant information across all 11 recommended categories has increased, but only one category - climate-related risks and opportunities under strategy – surpassed 50%. Only 30% or less of the reviewed reports disclosed information about:

  • Management’s role in assessing and managing climate-related risks and opportunities (governance);
  • Resilience of the insurer’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario (strategy);
  • Scope 1, 2, 3 GHG emissions and the related risks (metrics and targets); and
  • Targets used by the insurer to manage climate-related risks and opportunities, and performance against these targets (metrics and targets).

Overall an improvement compared to previous status reports, but still a long way to go to achieve full transparency in climate-related financial metrics in the insurance industry.

Why are climate-related financial disclosures relevant for insurers?

Climate change poses a risk to the business of insurers. This risk can stem from increasing frequency of climate-related natural disasters, transition to the net zero economy, and (for liability insurance) potential litigation against insureds (for example, for failure to assess climate change risks adequately). Many of the TCFD disclosure recommendations require companies to identify, assess and manage climate-related financial risks - an exercise which inevitably leads to better resilience to climate change impacts.

Lack of disclosure often reflects lack of internal understanding and management of the risk – indeed a recent report by S&P Global concluded that reinsurers underestimate their exposure to physical climate risk by anywhere between 33% and 50%. Finally, TCFD reporting by prospective insureds would help insurers to assess and manage their own climate risk. Leading by example may be the best strategy in this regard, which is yet another reason why insurers should step up their climate-related financial disclosures.

Recognising this, the UK government’s Roadmap towards mandatory climate-related disclosures published last year sets out an indicative path for the staged introduction of TCFD-aligned mandatory reporting by companies in all sectors over the next four years.

At the same time, other countries, such as New Zealand, Singapore, Japan, Hong Kong, Brazil, Switzerland and the EU have taken active steps towards making TCFD-aligned reporting mandatory, as summarised in the 2021 Status Report.