The ESG regulatory and political space will continue to be active this year, presenting insurance CEOs, CROs and CFOs with a challenge to address risk management, compliance and reporting alongside commercial opportunity — overall, there is much to digest, prepare and action in 2023.
1. Reporting and disclosure requirements continue to expand globally
Firms will need to assess the rising tide of requirements to identify what is relevant to them and prepare for compliance — a particular challenge for global firms. Necessary focus on climate related financial risk, emissions measurement and transition planning is broadening to biodiversity and the 'S' agenda in the EU and UK, particularly around Diversity, Equity and Inclusion (DEI). This is placing increasing demands on firmwide systems, controls, and finance teams. 1
2. ESG data remains a challenge, but with prospects for alignment
Sourcing consistent and comparable ESG data is challenging, and consequentially affects climate modelling and reporting, on which assurance is increasingly being sought. In response, the FCA is convening a working group to develop a voluntary Code of Conduct for ESG data and ratings providers which should go some way to help. 2
3. Concerns around greenwashing are escalating
European Supervisory Authorities (ESAs) have launched a call for evidence on the main risks and drivers of greenwashing, and the recent FCA statement on greenwashing will be at the forefront of CFOs' minds as they look at forthcoming non-financial reporting. Taxonomies will bring greater clarity, but companies may well choose more conservative disclosure. Relatedly, firms are under pressure to deliver against already published near-term targets.
4. Interest in the “S” agenda and biodiversity is growing
The EU Parliament has adopted new legislation on gender balance on boards of listed companies to take effect from 2026. In the UK, we await publication of the FCA, Bank of England and PRA joint consultation on diversity and inclusion in financial services firms and Lloyd's has issued guidance for its market participants. Biodiversity remains on the agenda following the publication of the Taskforce for Nature Financial Disclosure's (TNFD's) third iteration of its framework for nature-related disclosures. The final version is expected in September.
5. The geo-political landscape requires careful navigation
The challenging geo-political landscape presents a significant bandwidth stretch for CEOs to address both 'E' and 'S' implications. Firms will need to navigate carefully polarising and conflicting external ESG pressures, not least from inflation, cost of living and energy pressures.
6. Greater focus on a just transition
The Transition Plan Taskforce's (TPT's) new draft disclosure framework asks businesses to think about the role they can play in a just transition, beyond setting net zero targets. This includes how they can contribute to the economy-wide transition and leverage their spheres of influence. Insurers will need to think about how they work with their suppliers, value chain relationships, peers, and policy makers to drive systematic change.
7. Increasing focus on value and impact
ESG presents commercial opportunities, and firms are likely to reconsider their ESG strategy, public stance, and how product offerings might be developed, positioned, rated, and labelled from a sustainability perspective. Relatedly, firms will be considering how to take advantage of substantive investment in the green transition, while considering their own impact investments.
In short, ESG will be increasingly seen as a key business imperative, not a nice to have.
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1 The European Union’s Corporate Sustainability Reporting Directive (CSRD) has cleared the final legislative hurdles with implementation in 18 months’ time. The European Sustainability Reporting Standards (ESRS) have been finalised and submitted to the European Commission. In the UK the FCA has launched its long-awaited consultation on Sustainability Disclosure Requirements (SDR), with all FCA-regulated firms in scope for the new anti-greenwashing rule. Taxonomies remain in focus, but there have been delays in the UK government’s initial timeline for developing a Green Taxonomy. SEC disclosures are also on the horizon, needing tracked.
2 The recently published PCAF methodology will focus insurers’ minds on Scope 3 emissions. Assessing insured emissions presents some difficulties due to potential data misalignment between insured legal entities and their emissions and revenue reporting data. The guidance is an iterative process and currently excludes key business lines, for example: structured trade credit, surety, construction engineering lines, corporate life and pensions, and most personal lines.