Sustainable finance regulations signal a sea change for insurance sector

Tue 26 Apr 2022

The European Green Deal aims to achieve climate neutrality by 2050 and create a modern, competitive and resource-efficient economy. To meet its objectives, the European Commission has begun to restructure the non-financial reporting requirements for companies. Although some of the requirements were partially implemented in 2021, this is only the beginning of a real sea change for all stakeholders.

Major regulatory innovations in the insurance sector

Three regulations directly affect the insurance sector; the Corporate Sustainability Reporting Directive (CSRD), the Disclosure Regulation, which came into force in 2021, and Europe’s green taxonomy regulation aimed at encouraging sustainable investments.

The Corporate Sustainability Reporting Directive replaces the earlier Non-Financial Reporting Directive (NRFD). It aims to strengthen the non-financial reporting requirements to redirect investment towards the most sustainable companies. These requirements will cover a much wider range of companies and impose a much stricter framework in terms of content, which will enhance the comparability of European entities. The directive encourages companies to incorporate clear sustainability objectives in their strategy and reflect the degree of involvement of management teams. The directive also covers the communication of non-financial information to company stakeholders, including insurance entities.

The Disclosure Regulation focuses on sustainability-related disclosures in the financial services sector. It is logically linked to the CSRD since the information that financial market players, including insurers, will have to publish will be directly or indirectly derived from the disclosures made by all companies in which the insurance entities have invested. One aspect of this regulation came into force in 2021, with enhanced reporting on the sustainability of investments in the information provided to investors in financial and insurance products by defining which investments are sustainable and which are not.

Finally, the European Union’s (EU) “green taxonomy” focuses on the first two of six environmental objectives, those relating to climate change mitigation and adaptation. However, only adaptation to climate change relates to the activities carried out by insurance entities, including provident institutions, mutual insurance companies or insurance companies, as insurance businesses generate few greenhouse gases directly. The four remaining environmental objectives of the EU’s green taxonomy will be discussed and published in 2022 for implementation in 2023. The Taxonomy Regulation is just the first step in classifying business activities, as taxonomies dedicated to social and governance objectives will appear in the coming years.

Efforts accelerating

Faced with these new regulatory requirements, the entire sector is accelerating its organisational efforts, as we can see from certain initiatives. For example, the Net Zero Insurance Alliance initiative, initially founded by AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich, has now been joined by several other global or national insurance and reinsurance entities, such as Matmut in France at the end of November 2021. In addition, France Assureurs, formerly FFA, has published its proposals for the social and environmental transition.

It’s clear that non-financial information is becoming a central element of corporate reporting, which has to be integrated as early as possible in the process of establishing an entity’s strategy and objectives. As evidenced by recent regulatory developments and upcoming deadlines, the ability to adapt to a changing regulatory environment is now vital, as are deliberations on the relevant key indicators, both for reporting on policies and practices and measuring progress.