Greenwashing for insurers

At a glance:

• Regulatory activity around greenwashing is intensifying, and general insurers need to act now to anticipate growing regulatory scrutiny in the coming year. In the UK, insurers will need to comply with the FCA’s “anti-greenwashing rule”, which we expect to be introduced later this year. More generally, the Consumer Duty also raises the overall bar of consumer protection in the UK.
• Although the UK’s “anti-greenwashing rule” is not yet finalised, EIOPA’s recent progress report on greenwashing provides a helpful starting point for UK insurers to understand how greenwashing regulation is likely to evolve over time and regulators’ main points of concern. According to EIOPA, greenwashing is not limited to green insurance products. It could occur anywhere in the insurance life cycle or within processes related to entity management, including through ineffective internal governance and controls.
• Insurers should therefore adopt a robust approach to greenwashing risk, identifying their material potential greenwashing exposures and the associated controls. They should review the relevant sustainability data as well as internal and external communications and statements. Adopting a consistent and controlled approach to sustainability disclosures will also be a key mitigant given the changing sustainability reporting landscape.
• Insurers that make green claims in their financial statements, other climate‑related disclosures, marketing and product materials without an appropriate understanding of regulatory expectations, and without the involvement of risk and compliance functions, expose themselves to significant regulatory and reputational risk. Importantly, insurers need to look beyond regulatory requirements and expectations when it comes to managing greenwashing risk as they could be on the receiving end of climate litigation, which is clearly on the rise.
• The green transition will present risks and opportunities for insurers. A robust approach to greenwashing risk is a prerequisite for making the most out of the sustainability related commercial opportunities, while also managing regulatory and reputational risk effectively.

Who this blog is for: Board members and senior executives working across the UK general insurance (GI) industry, in particular in risk and compliance, legal, underwriting, investment and regulatory affairs teams.

Overview

Regulators are acutely aware that insurers face potentially significant greenwashing risks, both at a product and entity level.

At the entity level, many insurers have in some shape or form committed to achieve ambitious net zero targets related to their operations, investments and/or underwriting scope within tight timeframes. On the product side, some general insurers offer various green insurance solutions designed to mitigate climate risk or enhance resilience. In the absence of effective controls, some insurers could find themselves engaging in greenwashing on both these fronts. This could lead to customer harm and also expose insurers to regulatory or, given the increasing number of climate litigation cases, legal action.

The purpose of this blog is to explore recent regulatory developments related to greenwashing risks in the insurance sector and outline key steps that insurers can take to demonstrate they are taking action to address them at both entity and product level.

This blog is aimed at the UK GI industry in particular, although there is read-across from GI to life insurance when it comes to greenwashing, particularly at the entity level. With the UK regulatory framework still evolving, this blog focuses on key issues and concepts identified by EIOPA and the other European Supervisory Authorities (ESAs) in their recent reports. In our view, these inform the overall direction of travel for UK regulators as well, and therefore provide a helpful starting point for UK insurers to address greenwashing.

Regulators are ramping up

Both EU and UK regulators are currently working on establishing regulatory frameworks to prohibit greenwashing and take action if regulated firms engage in it. In the EU, EIOPA recently published a progress report in response to the European Commission’s Call for Advice on greenwashing, with the final report due in May 2024. This is one of the few insurance-specific regulatory publications on greenwashing to date and provides a helpful benchmark for insurers to assess how comprehensively they have integrated greenwashing into their risk management frameworks. Among other things, the progress report sets out a definition of greenwashing and provides several concrete examples of where greenwashing can occur in the insurance business model. In its final report, EIOPA will explore further greenwashing-related supervisory and enforcement measures and provide recommendations to improve the current regulatory framework. In our view, both the progress and final reports are likely to inform UK regulatory thinking and direction of travel.

The fact that the EU regulatory framework is still developing has not deterred individual EU countries from exploring greenwashing risk in their own jurisdictions; about half of National Competent Authorities (NCAs) have already carried out supervisory activities relating to greenwashing in the insurance sector, while five are currently investigating cases. A large proportion of NCAs have reported that they are unable to supervise greenwashing risk effectively due to various factors such as lack of data and regulatory resources, as well as gaps and inconsistencies in the regulatory framework. EIOPA’s final report may help in this regard, although any EU-wide regulatory framework requiring legislation to implement will inevitably take time to put in place. Regardless of this, EIOPA’s work will be helpful for the FCA and other regulators as they finalise their own views of greenwashing.

In the UK, meanwhile, the FCA is proposing to introduce an “anti-greenwashing rule” for all FCA-regulated firms, as part of its Sustainability Disclosure Requirements (SDR) initiative. The proposed rule, due to be finalised by the end of Q4 2023, requires regulated firms’ references to the sustainability characteristics of financial products and services to be clear, fair and not misleading. These references must also be consistent with the sustainability profile of the product or service, or, in the words of the FCA, “proportionate and not exaggerated”. Firms will need to identify which “references”, including entity-level disclosures, are relevant to their products and services. The scope is potentially very wide.

The "anti-greenwashing rule", together with the Consumer Duty outcomes, particularly on customer understanding, will give the FCA the ability to challenge firms on potential greenwashing in products and services, and where needed, take enforcement action against them.

How are insurers exposed to greenwashing?

One key challenge when it comes to greenwashing is the lack of an established and universally accepted definition; for example, the FCA’s SDR does not define the term “greenwashing” but rather provides a high-level description of it. For the purposes of this blog, however, we will use the ESA-'s'current definition of greenwashing:

“…a practice whereby sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants.”

Greenwashing is therefore not confined to marketing green financial products i.e., product-level greenwashing. In fact, EIOPA and the other EU regulators cast a wide net in terms of what they consider greenwashing, covering sustainability-related claims in relation to entities, voluntary disclosures and competency on greenwashing of relevant staff leading to entity-level greenwashing.

Greenwashing could thus occur anywhere in the insurance life cycle (including product development, delivery, and management) or within the entity management itself. EIOPA clarifies that greenwashing could occur as a consequence of an insurer’s lack of controls around its internal processes and governance structures. For example, where remuneration is linked to climate targets that are very easy to achieve and have no meaningful impact on reducing emissions (for a selection of EIOPA’s examples, see Appendix A).

Entity-level greenwashing could be material for the GI sector

In recent years, many GI firms have disclosed ambitious sustainability goals and made progress towards them. Some have also developed green investment strategies to ensure they channel capital towards more sustainable activities. However, without appropriate controls and evidence to substantiate these claims, these public commitments and statements could result in entity-level greenwashing.

Our research shows that to date, only a small number of GI firms offer green insurance products. In our view, GI firms are therefore potentially more exposed to entity-level greenwashing. As the economy transitions and green GI products become more prevalent, product-level greenwashing will become increasingly important too.

Regulators recognise that “greenhushing”, i.e. firms understating or remaining silent on their green ambitions to reduce the risk of greenwashing claims is a concern, because a perceived or actual lack of action on sustainability could expose firms to other sources of reputational risk. They do, however, want to ensure that sustainability statements are substantiated and well thought-through. GI firms should therefore review their sustainability statements with a particular focus on entity-level claims, ensuring the statements they make are fair and represent reality, backed by evidence and - where relevant - tangible plans.

How can GI firms get on top of greenwashing risk?

As a first step, GI firms should identify where and how they use green statements, targets, and metrics. They could use EIOPA’s list of example scenarios (Appendix A) as a starting point for this analysis, although it should be noted that the list is not exhaustive and there could be further examples of greenwashing depending on a firm’s business model, practices, and disclosures.

GI firms might wish to adopt a risk-based approach and focus their efforts on the most material greenwashing risks first. There are several actions that GI firms can take to identify and manage their most material greenwashing exposures:

1. Entity governance: To avoid greenwashing, GI firms should develop a clear, credible and consistent plan to achieve their sustainability objectives and targets, supported by an appropriate governance framework with clear roles and responsibilities for delivery and progress against metrics. In particular, GI firms should be able to demonstrate on a continuous basis that they have taken reasonable steps to ensure that sustainability-related decisions and disclosures are appropriate. This includes regularly revieing and challenging risk and control frameworks, and governance arrangements, in place to tackle greenwashing. Remuneration is also important – soft targets or metrics that could be perceived as insufficiently challenging can lead to executives being rewarded for doing their “day job”, which could amount to “little more than greenwashing” according to the FCA. Metrics and targets that firms use as they include climate and sustainability considerations in executive scorecards and long-term incentive plans will need to link clearly to the strategy to provide the right incentives.
2. Review sustainability data: GI firmsshould review and validate their sustainability disclosures and any associated metrics, targets, or goals for accuracy and consistency across their various green statements and reports, identifying data limitations and putting in place clear triggers for when to seek third party data assurance. Where GI firms use a mixture of internal and external sustainability data, they should undertake appropriate due diligence on third party sustainability data and ratings providers.
3. Review and test communications: GI firms should review and test internal and external communications to ensure clarity and consistency of messaging to employees and customers alike. Firm-wide sustainability related policies should be refined to be specific and understandable to both customers and employees, meeting the principles of “clear, fair and not misleading”. GI firms can draw on the Competition and Markets Authority (CMA) checklist (Appendix B) which includes a helpful list of simple yet powerful questions that firms should be able to answer affirmatively whenever they make green statements. For example, is the green statement accurate and clear so that everyone can understand it? Is there up-to-date, credible evidence to show that the green claim is true? These types of questions should provide a helpful starting point as insurers review their green statements.
4. Embed greenwashing within risk and governance frameworks: GI firms should establish an effective governance framework for regularly reviewing, maintaining, and approving relevant statements and reports, including internal policies, regulatory requirements and additional reporting requirements stemming from memberships of certain industry-led initiatives. They should determine how greenwashing risk fits in their risk management frameworks, including in the firm’s their overall risk appetite. In our experience, firms’ greenwashing risk management has improved in terms of overall maturity, especially when it comes to the involvement of firms’ first line of defence, which was not always the case until recently.
5. Focus on sustainability disclosures: One of the key ways in which greenwashing risk could crystallise is through inadequate or misleading disclosures as well as product-level marketing materials and disclosures. The sustainability reporting landscape is complex and still evolving. Although several UK GI firms already choose to disclose various information in their transition plans and other reports through frameworks such as the Task-force for Climate-related Financial Disclosures (TCFD), ensuring consistency is often challenging.

GI firms should therefore consider adopting a central, top-down approach to sustainability disclosures across the board, ensuring, where possible, a consistent use of data, metrics, and targets. There should be a clear delegation of responsibilities related to reporting, with designated ownership of each individual task and overall ownership of the action specifically assigned to an individual from the firm’s leadership team. GI firms’ compliance, risk and internal audit functions have a key role to play here, ensuring there are controls in place to prevent potential inconsistencies or inaccuracies. In some cases, GI firms may want to obtain independent verification and validation of sustainability disclosures, including through their own internal audit function or independent assurance providers.

Conclusion

As the UK and European economies transition to meet net zero targets, greenwashing risk is attracting increased regulatory attention. EIOPA has signposted detailed greenwashing scenarios where greenwashing can arise at both entity and product level. UK insurers can use these examples to develop a robust approach to identifying the areas of material greenwashing risks, and take steps to implement the necessary controls and safeguards around them. With the FCA’s “anti-greenwashing rule” just around the corner, UK GI firms should review the example scenarios of where greenwashing can occur and identify any material risks and exposure, ensuring they are addressed in their governance and risk management frameworks. A robust approach to greenwashing risk will help mitigate both regulatory and reputational risk.

More importantly, the green transition will present commercial opportunities for most GI firms and maintaining appropriate safeguards on greenwashing risk will provide a strong foundation for pursuing these opportunities successfully.

Appendices

A: A non-exhaustive list of greenwashing examples from EIOPA

B. CMA checklist