Regulators build momentum on Climate Change and ESG Reporting

As we enter 2023, the world’s focus remains on the biggest challenge facing the planet – climate change. And politicians need to take heed of wider public and business opinion. As insurer AXA underlined recently in its 2022 Future Risk Report, for the first time ever, climate risk topped the risk rankings in all regions of the world, and was also the top concern for the general public in the US. 

The regulators, particularly in the UK and Europe, are leading the charge, putting their own requirements in place to help drive good practice. 

As a result, the UK financial sector seem to be somewhat ahead of the game in terms of reporting on climate change, and Environmental, Social and Governance (ESG) concerns. For example, the UK was one of the first G20 countries to have regulations enshrined in law. As of 6 April 2022, it is mandatory for larger businesses to disclose their climate-related risks and opportunities. This impacts over 1,300 of the largest UK-registered companies and financial institutions, and the reporting requirements are in line with the recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD).

For now, the TCFD currently only impacts larger firms with at least 500 employees and turnover greater than £500m but it will eventually become applicable to smaller firms.

Beyond climate related disclosure

TCFD is only the starting point and new Sustainability Disclosure Requirements (SDR) are being introduced in the wake of the UK Government’s Roadmap to Sustainable Investing. These go beyond climate to embrace ESG more broadly. The SDR will apply to all UK registered and UK listed companies including re/insurers and will be rolled out in phases over the next few years. It will eventually integrate the global standard being developed by the recently formed International Sustainability Standards Board (ISSB) which was established in 2021 under the International Financial Reporting Standards Foundation.

The Financial Conduct Authority (FCA) is still consulting on SDR, with final policy not expected until at least the first quarter of 2023.

In terms of ESG, there are three key bodies proposing rules for ESG reporting:

  • the European Financial Reporting Advisory Group (EFRAG) in Europe,
  • the Securities and Exchange Commission (SEC) in the US; and at a global level,
  • the International Sustainability Standards Board (ISSB).

These regulatory pressures aside, many UK re/insurers are already reporting on ESG. In fact, according to broker Marsh, 38% of UK insurers currently consider ESG factors in their underwriting models and rating tools, and nearly half of the respondents (47%) to its survey suggested they were using external rating providers to help assess their clients’ ESG performance.

Stress testing 

There remains however a lot of work to do. The UK financial sector has been through a stress testing exercise, driven by the Bank of England, and in 2022 it posted the results of its 2021 Climate Biennial Exploratory Scenario (CBES) - which applied to the UK’s largest insurers and banks. It was noted that many submissions were short on data and that modelling approaches varied. As a result, it is taking a one-on-one approach to address gaps with different companies. The outputs from the CBES are also now being fed into its future thinking in terms of the policy target of net zero. They are also being considered in the Prudential Regulatory Authority’s (PRA) supervisory approach, along with any lessons and insights shared at an international level.

Further afield

Beyond the UK, other countries are also taking action. Switzerland declared disclosure to be mandatory in July 2021 and Japan introduced the same approach in April 2022.

In mainland Europe, the European regulator EIOPA has set out expectations for climate change risk scenarios in its ORSA (Own Risk Solvency Assessment) and the European Central Bank (ECB) has put in place a series of deadlines for banks to deal with climate and environmental risks with full alignment and expectations to identify and manage risks required by the end of 2024.

The ECB said that whilst many banks have put basic practices in place, 85% lack sophisticated methodologies and granular information on climate and environmental risks, and that banks significantly underestimate the breadth and magnitude of these risks, with 96% having “blind spots” in identifying them.

Also in Europe, as part of the EU Sustainable Finance Action Plan, firms are being mandated to report in line with EU taxonomy including the Corporate Sustainability Reporting Directive (CSRD) and Sustainable Finance Disclosure Regulation (SFDR) – both of which will entail a lot of work by firms in terms of preparation.

CSRD is the new EU legislation that requires all large companies to publish regular reports on their corporate sustainability, building on the existing NFRD (Non-Financial Reporting Directive) regulation. Large companies must submit their report aligning with the CSRD over the next couple of years. It will also, eventually, become mandatory for SMEs.

The SFDR, which started in March 2021, regulates investment management sustainability, enabling investors to make informed decisions about the sustainability of their investments.

Get in touch

Both in the UK and in the European Union, climate change and ESG reporting requirements are becoming ever more complex. JBA Risk Management launched its global suite of climate change tools at the end of 2022 and is well placed to support the re/insurance and financial sectors with flood risk insights for today and the future. Get in touch if you think we can help. We are always happy to talk.

This article presents a quick summary of some regulatory requirements which we believe to be correct at time of publication (January 11, 2023). See Website Terms.

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