A European View on Insurance-Associated Emissions Reporting

Carbon dioxide equivalent (CO2e) emissions have become one of the most important metrics for climate reporting across industries. Indirect Scope 3 emissions form the main source of emissions for insurers – with CDP reporting finance portfolio emissions are over 700 times larger than direct emissions. As financial institutions, re/insurers enable emissions through their financing and insuring business.

Guidance for greenhouse gas emissions (GHG) disclosure is provided by the GHG Protocol. Building on the GHG Protocol, the Partnership for Carbon Accounting Financials (PCAF) has developed Standards for Financed and Insurance-Associated Emissions (IAE). While the scope of the PCAF Standard for IAE is currently limited to personal motor and commercial lines insurance, future scope development is expected - depending on PCAF members’ feedback in property, treaty reinsurance and potentially life and health. Meanwhile, the Science-Based Targets initiative (SBTi) is expected to launch their Financial Institutions Net Zero Standard in early 2024 at the latest, to enable financial institutions to set net zero targets that are consistent with achieving a net zero world by 2050.

The UN-convened Net Zero Insurance Alliance (NZIA) published its first Target Setting Protocol in January 2023, initially requiring member insurers to set and disclose science-based, interim decarbonization targets but has since made the Target Setting Protocol a voluntary best practice. The following months have shown adverse developments for the NZIA, with major insurers leaving the NZIA following threats of antitrust legal action in the USA. We note that re/insurers who have left the NZIA have still committed to net zero targets and are, therefore, preparing to measure their IAE.

Moreover, we expect that most re/insurers will assess emissions of the underwriting portfolio as material when assessing double materiality and therefore be required to disclose IAE under EU Corporate Sustainability Reporting Directive (CSRD) if they fall within the scope of the Directive. Insurance and reinsurance companies generally have an indirect role in facilitating emissions for the real economy. For example, insurers provide risk transfer services to key sectors such as energy or transportation.

The huge challenge re/insurers are facing is to consider how they can influence the vast amount of indirect emissions they re/insure. In addition, key practical challenges for re/insurers include enhancing the quality of data used to determine IAE and weighting sustainability key performance indicators (KPIs) with financial KPIs to paint a coherent overall picture of their activities. Re/insurers will have to adapt their underwriting and policy management procedures and standards, as well as implement overarching master data management standards and tools to effectively meet the requirement of assurance of CSRD disclosures.

Whilst we expect the PCAF Standard on IAE to expand the emission measurement scope beyond commercial and personal motor lines for non-life re/insurance, we anticipate that life re/insurers will initially continue focusing primarily on reducing organizational emissions through their investment portfolio.

Our article provides further insights into the areas outlined above.