Insurance sector ESG & Sustainability highlights - 2023 round-up and 2024 horizon

ESG & Sustainability casts a wide net.

From supply chains to products; preventing greenwashing and managing risks; to culture and diversity; ESG & Sustainability reaches all areas of a business. It may be the most significant and the most interesting challenge yet, for businesses and economies globally. In Ireland, as elsewhere, it is a major focus of numerous government policies and frameworks. For regulated firms including in the insurance sector, it is also a key supervisory priority of the Central Bank of Ireland (the CBI).

As 2023 draws to a close, it is a good time to take stock of key ESG & Sustainability developments in the insurance space; and look ahead to what is coming down the track for 2024.

Ownership of strategy and implementation at senior level is a core focus for the CBI. In its 2021 ‘Dear CEO’ Letter (on climate and other ESG issues), the CBI called out the need to demonstrate that ownership of strategy and to promote a culture that places an emphasis on climate and other ESG issues. This has been a continuing theme for the CBI with a recent reminder (in its December 2023 Insurance Quarterly newsletter) that implementation of the governance expectations set out in the CBI guidance for (re)insurers will be a topic for review under the CBI’s 2024 supervisory plans.

In an ever more complex ESG & Sustainability landscape, how can that ownership be demonstrated?

Awareness, leadership, consistency of attention, integration and embedding across business functions. ESG & Sustainability is now expected to be part of our thought process. As such, boards and senior management (in particular) will play an important role in maintaining awareness of ESG and embedding ESG considerations into their operations.

ESG & Sustainability developments also present a significant compliance challenge. This is the case across all business divisions; underwriting, investment and capital, outsourcing, servicing and distribution, as well as more BAU activities such as due diligence and vetting procedure and many more.

This article gives a snapshot of the headline developments at an Irish and EU level, and asks: ‘what is in store for 2024’?

To keep up to date with the latest ESG & Sustainability developments, sign up to ALG’s ESG & Sustainability bulletin here.

2023 lookback

  • Growth in regulatory reporting

Regulatory reporting requirements remain an ever growing and complex area for the insurance industry.

At a time when efforts are underway to slim regulatory reporting for (re)insurers under Solvency II, life insurers have been grappling with the added complexity of the Sustainable Finance Disclosures Regulation (SFDR), and all insurers have general reporting requirements under the Corporate Sustainability Reporting Directive (CSRD). The CSRD contains many principle led rules on disclosure including setting out at a high level the information that must be contained within an undertaking’s sustainability statement. These sustainability statements must adhere to their own set of detailed rules: the European Sustainability Reporting Standards (ESRS). The ESRS were developed by the European Financial Reporting Advisory Group (a group comprised of representatives of stakeholder organisations and national standard setters), tailored to EU policies but building on and contributing to international standardisation initiatives. So, a multi-layered disclosure regime.

One of the most important features of the CSRD differentiating it from other reporting requirements is its ‘double materiality’ assessment. This requires companies to assess not only how sustainability issues might create financial risks for the company, but how the company may impact on people and the environment. ESG & Sustainability is a two-way street.

Not only an issue for (re)insurers, ESG & Sustainability is also very important for insurance intermediaries and service providers. Intermediaries providing advice on IBIPs are in scope under SFDR and both intermediaries and service providers may also be in scope for CSRD based on their size.

  • The question of climate risk

In March 2023, the CBI published its finalised guidance for (re)insurers on climate change risks. The Guidance aimed to clarify CBI expectations on how to address climate related risks and assist development of governance and risk management frameworks to do so. However, this is a challenging task due to a lack of reliable data concerning climate risks (and the CBI acknowledged this).

Feedback to the industry contained in the CBI September 2023 Insurance Quarterly Newsletter (based on ORSAs received in 2022 and 2023) highlighted that there was more work to be done to cater for:

        (a) indirect impacts of climate change and,

        (b) action needed on the back of materiality assessments to implement findings into firms strategy and business planning.

As part of the feedback, the CBI issued a reminder of amendments to the Solvency II Delegated Acts which introduced obligations for (re)insurers to manage 'sustainability risks' and ensure sustainability factors are taken into account in risk assessments.

  • Prevention of greenwashing

With consumer demand for sustainable products on the rise, both market forces and reporting compliance (for example, under the SFDR) are key drivers of the insurance sector’s focus on sustainability credentials.

On 1 June 2023, the European Insurance and Occupational Pensions Authority (EIOPA) published its progress report on advice to the European Commission on greenwashing. The interim report outlines how greenwashing may occur, its impact, the challenges related to its supervision and its implications for the regulatory framework.  

EIOPA also highlighted that national competent authorities have started to integrate greenwashing considerations into their supervisory activities (including ‘SupTech’ (use of technology to identify cases of potential greenwashing and vet market practices)).

The CBI welcomed the report from EIOPA and reminded insurers to be vigilant to make sure that any sustainability claims made are “accurate, evidence based and clearly communicated”.

A real risk in relation to greenwashing is that of “greenhushing”, where firms decide not to fully communicate their sustainability efforts, to avoid falling into greenwashing practices and maybe sometimes just to avoid ‘getting it wrong’. In early 2023, the CBI commented that such concerns should not be a reason for reducing product offering. As a result, there may be a fine line to be walked between making green claims, and not making claims where there is uncertainty.

  • The Climate Protection Gap

One of the biggest challenges currently facing the sector and the general economy is the response to climate protection gap.

Current estimates are that only circa 25% of losses from climate related disasters are covered by insurance. As the effects of climate change increase, there are likely to be more severe weather events.  There is pressure on the sector to work to provide solutions. In April 2023, the European Central Bank and EIOPA published a joint discussion paper on possible actions to reduce the gap. Among other matters, a ‘ladder approach’ was proposed. This would/could include impact underwriting (use of climate-adaption measures to inform underwriting practices), the creation of insurance linked securities, but also risk sharing between public private partnerships and EU Fiscal Support (an acknowledgement that the sector cannot realistically resolve the gap alone).

It is clear that policy level action is needed. Potential opportunities for (re)insurers to develop new and innovative products to address increased climate risk also exist. Read about it in our previous article here. 

What’s in store for 2024?

  • IAF and SEAR – the ESG dimension

The introduction of the IAF (Individual Accountability Framework) including SEAR (the Senior Executive Accountability Regime) will bring increased focus to embedding ESG for regulated firms.

Of most importance to insurers is a new responsibility known as ‘PR 24’. Prescribed Responsibility (PR) 24 (Responsibility for managing financial risks from climate change), was added by the CBI to its list of responsibilities within scope of the regime in its recent feedback statement. It is not the only role that may have an ESG complexion. Other PRs may also be considered relevant to the ESG space including those that focus on the culture of the firm which is linked to the “S” and “G” strands of ESG. For example:

  • PR 4 - Leading development of culture, including on diversity and inclusion, for the Board.
  • PR 5 - Overseeing adoption of culture, including on diversity and inclusion, day-to-day.

PR 21 which relates to oversight and governance of strategic decisions, key business initiatives including development of products to ensure focus on delivering fair outcomes for customers, is particularly broad, and arguably could include monitoring of an entity’s sustainability claims. Similarly, compliance roles have the capacity to overlap with ESG & Sustainability.

For the latest on the IAF and SEAR, please see our IAF page.

  • ESG and the Minimum Competency Code

Last month, a notice was published by the CBI confirming proposed amendment of its Minimum Competency Code to include sustainability competencies for all retail financial products. This will apply from 1 January 2025, for those selling or providing advice on financial products/services that incorporate a sustainability element. This includes life assurance products, personal general insurance, commercial general insurance, private medical insurance and associated insurances.

Among other matters, individuals selling retail financial products will need to be able to draft suitability statements that show how sustainability preferences have been taken into account (and sustainability can be taken into account for CPD). The CBI has also incorporated knowledge requirements based on the sustainability related amendments to the Insurance Distribution Directive.

  • Updated CPC

One of the key themes of the Consumer Protection Code (CPC) review currently being undertaken by the CBI is climate matters.

As part of its messaging in that context, the CBI has focussed on the obligation to act in customers’ best interests: with specific emphasis on doing so as products and services evolve to respond to climate change. Proposals include, seeking to ensure that sustainability claims can be substantiated with hard evidence to the extent possible (and ensuring that personnel have a good understanding of any green credentials of products they are selling).

  • Other developments

Numerous other developments are coming rapidly down the tracks in 2024.

These include:

  • Corporate Sustainability Due Diligence Directive (CSDDD) – Provisional agreement on CSDDD was reached on 13 December, and it expected to be formally adopted in 2024. CSDDD will set obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners. While there are some exemptions for the financial services sector, in scope insurers will need to comply with certain provisions including the requirement to adopt a climate transition plan.
  • SFDR review – The Commission public consultation period closed on 15 December. The review of SFDR is wide ranging and may result in changes to the SFDR regime in the future.
  • The AI Act – As we noted earlier this year, the use of, and focus on the use of, big data and AI is rapidly increasing in the insurance sector. However, with the upcoming introduction of the AI Act (re)insurers may need to consider their use of AI and how it will be impacted by the Act on an ESG level (the focus being on use of AI for insurance underwriting and claims).
  • Tech and ESG – Collectively, a range of technology and data developments and evolution have a material cross relevance with ESG & Sustainability. To name a few, a) technology as a driver and support of ESG strategy, b) artificial intelligence (including the ‘S’ and ‘G’ elements of ESG, such as ethics and bias), c) servicing technology developments including DORA; - and many more.
  • Climate risk -The CBI has recently noted that review of the governance and materiality aspects of the Guidance are part of its supervisory plans for 2024.
  • EIOPA final greenwashing report - EIOPA plans to propose improvements to the regulatory framework in its final report which will be published in May 2024.

Keep an eye on our website for further insights in 2024.

Food for thought

ESG & Sustainability issues will continue to remain a hot topic for many years to come.

Some questions that boards and senior management of (re)insurers and intermediaries may wish to consider:

  • Can more be done to embed ESG & Sustainability thinking across the business (governance and otherwise)? Are ESG & Sustainability issues a standing agenda item at meetings and for all decision making?
  • How is climate risk being incorporated into the ORSA? Have any data gaps been identified? Are indirect risks also being considered?
  • Is your business taking steps to ensure it can stand over any claims made in relation to sustainability? Is the basis for the statements made reliable, comparable, and verifiable?
  • Have you a “consumer champion” or any senior member of personnel focused on sustainability preferences for consumers? Has that person reviewed your firm’s sustainability disclosures, any “green” claims in product literature? Have you considered the IAF/SEAR impact (see above)?
  • Is sufficient training in place for those selling and advising on insurance products to be able to consider the sustainability preferences of consumers?

For advice or for further information on this topic please contact Laura Scanlan, Associate, Sinéad Lynch, Partner, or any member of the ALG’s Insurance & Reinsurance team.

Date published: 22 December 2023