Navigating beyond the headlines: Transition Plan Taskforce Disclosure Framework

In November, the Transition Plan Taskforce (TPT) issued sector guidance for insurance companies, asset managers and asset owners within financial services. Aligning with International Sustainability Standards Board (ISSB) standards, the headline grabbing aspect was the expectation that financed emissions including those from insurance underwriting were disclosed as part of Scope 3 Greenhouse Gas emission disclosures.

In this article, we explore the broader implications for re/insurers implementing the disclosed framework.

In our Transition Plan Taskforce deliver disclosure framework for climate transition plans article, we highlighted the significance the framework will be within the financial services sector, given the Financial Conduct Authority (FCA) has been involved in its development and strongly supports its adaptation. After its launch, the FCA communicated its commitment to draw on the TPT Framework – as well as the ISSB standards – as it further develops its climate-related disclosure expectations for listed companies, asset managers and FCA-regulated asset owners.

While the sector guidance appears concise, it introduces 11 policy requirements linked to 21 financial metrics and targets, posing a comprehensive set of challenges for insurers.

What are the expectations set by TPT for insurers?

At first glance, actions required are relatively limited and somewhat mundane. The policy requirements address several expected topics, confirming the insurer’s stance towards high impact sectors, in terms of physical (e.g., cost developments) and transition risks (e.g., coal, oil and gas). A requirement to offer insurance protections for less carbon intense industries and engaging with clients on their transition plans are hardly revolutionary. Neither is a requirement to take account of climate risk in risk selection and pricing models. However, a closer look at the suggested financial metrics and targets reveals these to be more challenging.

Implications for Insurers

We have identified five interesting implications of this draft sector guidance, subject to consultation and review.

1. Structured client engagement process.

The sector guidance sets a policy expectation that insurers ‘set standards and conditions for ongoing business engagement, ensuring alignment with climate objectives’. This is followed up with a set of reporting metrics forcing organisations to establish formal and structured engagement processes, like those that have been in place for asset managers implementing stewardship programmes.

There are expectations that insurers can report on, for example, the number of client engagement contacts where net zero information was requested, the percentage of the portfolio which was subject to engagement activities, and the number of engagement processes that led to a ‘material positive change’ such as clients providing independently verified emission reduction targets.

Clearly this means a more structured approach to what is increasingly being termed ‘Responsible Underwriting’ and consistency being applied on a top-down basis by organisations, to enable them to report back on engagement activities, in a consistent manner across geographically diverse operations and specific lines of business, where underwriting cultures may differ significantly.

Changing the way in which underwriters interact with their clients has much wider implications than merely reporting back on some performance metrics. Defining what engagement looks like and ensuring that the tough questions get asked is really about driving culture change.

2. Capturing underwriting data analytics.

There is a clear implication from several of the proposed reporting metrics that insurers can capture granular information about their underwriting portfolios and their client’s climate-related commitments and plans. Examples of metrics which may prove challenging to report against include:

• % clients who have Science Based Targets (aligned to SBTi)
• % clients which have formal Transition Plans
• % clients who have provided Net Zero disclosures.

Again, capturing the data consistently across diverse operations and lines of business could provide a significant data management challenge. However, the bigger challenge is ensuring that underwriting teams are educated in the language of Net Zero, so they can ask for these documents, and they are able to make judgements about the quality of the information they receive in return. These requirements have the potential to change the way underwriters think about risk selection and pricing.

3. Acknowledging Insurance Associated Emissions methodology.

Although the guidance never specifically mentions the Partnership for Carbon Accounting Financials (PCAF) methodology for the calculation of insurance associated emissions, the way the requirements are laid claim nods towards this being the gold standard in this regard.

This is particularly clear in the way the sector guidance breaks out three metrics to focus on:

• emissions from commercial line portfolios, listing the lines of business covered by the PCAF methodology.
• emissions from personal motor portfolios.

This is not particularly unique, as the ISSB S2 standard has a requirement for financed emissions to be disclosed, but that standard is very much silent on how this should be calculated. There is also an allowance for future PCAF standards by referring to emissions ‘from other source in line with developing insurance associated emissions framework’.

4. Recognition of engagement and training.

Interestingly the guidance recognising the importance of engaging with decision making staff in respect of climate change. Embedding climate change and sustainability considerations within core functions, such as investments and underwriting is at its heart a change management exercise. Although the suggestion that insurers report on the ‘number of function specific training sessions’ including those provided to underwriters, investment managers and brokers is quite a blunt measure, it sends a strong signal. This is not just a technical matter; you need to engage the people who are being relied upon to implement the change. It also means that organisations need to capture and report on this information in a consistent manner.

5. Importance of disclosing risk exposure data.

The sector guidance does anticipate the disclosure of several exposure metrics to help to calibrate insurers vulnerability to climate change. The two most obvious are:

Annual aggregate risk exposure to weather-related catastrophes: A requirement to disclose a climate physical risk metric such as this, is not surprising as this type of measure has been anticipated for within the ISSB S2 standard. Currently the TPT sector guidance is significantly less detailed and prescriptive in what it expects to be disclosed that this international standard, and so this element may not in the end have significant impact, other than reinforcing the expectation over disclosure.

Exposure to carbon-related assets by sector within the underwriting portfolio: This represents an attempt at capturing information regarding an underwriting portfolio’s aggregate exposure to sectors at significant transition risk and so make sense within sector guidance related to transition plan reporting. The devil will be in the detail given the definition of ‘carbon-related assets’ will need to be standardised. It is to be hoped that this definition becomes a common currency across this and other global climate reporting standards, so insurers can standardise their reporting taxonomies. Given that many insurers use SIC or NAIC sector coding to classify their insurers and assist with risk-based pricing, it is to be hoped that clear definitions emerge and can be consistently applied in reporting privately to insurance sector regulators, who are increasingly issuing climate-related information requests of this type.

To effectively respond to this evolving landscape, insurers are advised to:

Our strong steer is to use the time between this TPT guidance being issued, and its likely adoption by the FCA in perhaps 2025, to review how climate change is being factored into underwriting. Now is the time to take control of the agenda and make sure you are well prepared by:

1. Establish responsible Underwriting program.

An insurer cannot hope to suddenly start reporting on client engagement on climate risk issues. The foundations of a process need to be established. We would argue that there is something to be learned from the asset management industry in how they have adopted engagement as part of their responsible investment and stewardship programmes. Under pressure from asset owners, such as re/insurers, they have adopted structured programmes to ensure that they engage appropriately with key counterparties based on scale and/or sector focus. Adopting an engagement-led approach in underwriting means driving consistent conversations across a portfolio and has wider implications for communication and training across the underwriting community to ensure they understand the objectives of the exercise and what good looks like.

2. Address data management implications.

There are consideration data management implications associated with this sector guidance. Insurers are going to need to be able to cut and dice information about their overall underwriting portfolio in a number of new ways. Indeed, their underwriting systems and processes and going to need to be capable of capturing the underlying information requested so that it can be analysed and rolled up into management information reports.

This implies a certain investment in time to establish the data architecture and analytics required, but also consideration needs to be given to the underlying processes for data capture and the associated internal controls to ensure that this information can be reliably disclosed externally without risk of misstatement or challenge.

This comes back to the need to establish more robust sustainability reporting frameworks within organisations capable of reporting on a variety of metrics with controls to a similar standard of maturity as those currently associated within financial reporting.

3. Prioritise change Management.

It is worth recognising that the pressure continues to build on re/insurers to transform their underwriting processes to integrate climate and sustainability to the core of what they do in terms of risk selection and pricing. This is by its very nature the engine room of any insurance organisation and change means addressing culture to ensure buy-in and long-term engagement. This is not going to be a quick fix. It needs strategic commitment from the top and it needs to be aligned to the organisation’s purpose and values to succeed.

Determining how to respond to the increasingly challenging climate-related reporting environment is a growing issue for many organisations. At Crowe, we support our clients’ climate journey by:

• providing an overview of the existing frameworks and initiatives, as well as the current market and industry insights
• helping to determine how to embed climate risk and sustainability factors into underwriting
• reviewing their draft disclosures and providing informal and/or formal feedback.

Please contact Alex Hindson or your usual Crowe contact for more information.