Towards Net Zero: Harnessing the Transformation Agenda

Arguably the greatest transformation challenge humankind has ever faced is staring right at us. The world has ten years to halve global greenhouse gas emissions to avoid global warming of above 1.5°C, beyond which the devastating impacts of climate change become irreversible. Delivering on net zero requires a wholesale business transformation for the insurance industry. No area remains untouched – from strategy, product development, sales and marketing, innovation and underwriting to corporate finance, risk and compliance, procurement and people.

The key role of the insurance industry in the transition to net zero

2020 marks the start of what has been highlighted as a crucial decade by the international scientific community for achieving net zero by 2050. The opportunity to combine the ongoing rebuild with a net zero transition is significant, since financial institutions can advocate for ambitious transformations as they recover from the COVID-19 crisis and unlock opportunities for value creation at the same time.

The insurance industry has a vital role to play in the transition to low-carbon, climate-resilient and sustainable communities and economies. Climate change presents a triad of physical, transition and liability risks to the insurance industry, and climate awareness is increasingly being integrated into underwriting, investment and group-wide risk management practices.

The transition to net zero brings opportunities for the insurance sector, especially in the following areas:

Product innovation
Growth in client segments
Product differentiation

However, the transition also creates additional challenges for insurers:

Required data availability and accessibility
Asset origination
Strategy or impact measurement

The regulatory landscape

In the last few years, numerous countries have committed to net zero goals in order to achieve the ambitions of the Paris Agreement. Subsequently, regulatory measures are putting pressure on the real economy to move in the direction of net zero, and thus indirectly also impact the insurance industry. At the same time, its goal is simply the consistent implementation of the insurance industry’s business model: the management of risks. This requires transparency, and the current regulatory developments support this need:

In the European Union, the upcoming Corporate Sustainability Reporting Directive (CSRD) will include extended disclosure requirements for listed and large companies. These will contain a dedicated topical standard on climate change, and include references to established standards such as the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) (see EFRAG).
Also in Switzerland, the Federal Council advocates preparing a consultation draft regarding the implementation of the TCFD recommendations for Swiss companies, which is expected in summer 2022. It will likely be implemented by means of a separate executive order on the counterproposal to the Responsible Business Initiative (RBI) (see ADMIN).
For the financial market in particular, the Swiss FINMA has introduced disclosure requirements for climate-related financial risks for insurance companies (see FINMA).

The Science-Based Targets initiative (SBTi)

The regulatory developments are putting pressure on insurance companies to set ambitious net zero goals. Therefore, a foundational guide for the science-based assessment of corporate net zero targets has been provided by the Science-Based Targets initiative (SBTi).

The initiative allows financial institutions to set science-based targets, align their financial and operational activities with the Paris Agreement and ultimately reconcile financial flows with the path towards climate-resilient development and low greenhouse gas (GHG) emissions. Beyond the company’s own ambitions, partners and customers should be encouraged to set their own targets and reduce emissions.

1,155 of those global enterprises – more than 10 of which are insurance companies – have developed science-based targets which commit to the 1.5°C target. These pioneering companies will lead the way to a world which is aligned with the Paris Agreement, and empower peers, suppliers, and customers alike to follow their lead.

Conclusion for insurers

In order to deliver on their net zero commitments, insurers will need to undertake an end-to-end business transformation. This includes understanding the implications of net zero on a company’s growth strategy and operating model and embedding net zero across all business functions, from governance through to value chains, finance and innovation.

Net zero is not a standalone project. It requires a holistic view across an ecosystem that includes government, businesses, customers and communities. To reach the net zero goal, organisations need to identify and prioritise their climate risks and opportunities. This means understanding where they are today, where they want to go and what strategies will get them there.

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