Through the indirect counterproposal to the responsible business initiative (RBI) Swiss insurance companies are going to be required by law to report on the risks of their business activities in the areas of the environment, social issues, employee interests, human rights and the fight against corruption, as well as on the measures taken against them.
National regulators are increasingly adopting internationally recognized frameworks. For example, FINMA has specified the transparency obligations on climate-related financial risks in the amended “Circular 2016/2 Disclosure – insurers”[i], which is based on TCFD. FINMA is thereby aiming for a proportional and principle-based disclosure, which was applicable for the first time to the 2021 reporting by large insurance companies (supervisory categories 1 and 2). At national level, in addition to the FINMA circular, indirect counterproposal to the responsible business initiative (RBI)[ii] is also intended to ensure increased transparency: Swiss companies are going to be required by law to report on the risks of their business activities in the areas of the environment, social issues, employee interests, human rights and the fight against corruption, as well as on the measures taken against them. The new provisions entered into force on 1 January 2022 and, following a principle of proportionality, will apply to large companies[iii] with a transitional period of one year from 2023. The requirements for climate disclosure obligations introduced as part of the indirect counterproposal to the responsible business initiative are specified by the Ordinance on Climate Reporting for Large Swiss Companies[iv]. The Federal Council opened the consultation on 30 March 2022 and aims to enforce the implementation of TCFD for large Swiss companies with the same objective of increasing the transparency and comparability of information on climate issues and climate targets.
However, the national focus is not only on the increased corporate transparency, but also on the danger of greenwashing. FINMA has outlined its expectations in its guidance on preventing and combating greenwashing[vi].
At EU level, the EU action plan on sustainable finance is being rolled out further through a large number of regulations. The Corporate Sustainability Reporting Directive (CSRD), in particular, will expand the requirements for companies for the scope and type of sustainability reporting. It will require companies to report on their sustainability activities, probably starting from financial year 2023.
The European Insurance and Occupational Pensions Authority (EIOPA) has issued publications and recommendations for insurers as part of its activities on sustainable finance to enable the transition to a more sustainable economy. They deal with the key challenges of climate change-related risk for the insurance sector and, as a result, affect frameworks, such as Solvency II and the EU Taxonomy, which are also being specified. The amendments to the Solvency II Delegated act will be in force from 2 August 2022 and require integration of sustainability risks in the governance of insurance and reinsurance undertakings (incl. investment and remuneration policies and system of risk management). Moreover, the new Solvency II Art. 45a requires insurers to perform climate-change scenario analysis. As a consequence, EIOPA issued the consultation paper on application guidance on running climate change materiality assessment and using climate change scenarios in the ORSA which sets out the supervisory expectations.
In addition, the Insurance Distribution Directive (IDD) is intended to provide clarity on fiduciary obligations for sustainability aspects and encourage insurance companies to take sustainability risks into account in their risk management and in their assessments. In order to meet the increasing requirements, insurance companies not only need to think about their disclosure process, but also about the adjustments of internal risk models and processes, for example, to take into account climate scenarios within the ORSA process and the associated disclosure. These EU regulations will become particularly relevant for Swiss insurance groups that have subsidiaries in the EU.
Further developments are foreseeable at the international level in the near future. For example, the United States Securities and Exchange Commission (SEC)[i] has also published amendments to disclosure standards, which are expected to come into force at the end of 2023. In the future, companies will be required to disclose climate-related information in the annual report, including aspects with regard to the governance, risk management and possible material consequences of climate risks for the annual financial statements and strategy. The SEC also explicitly stipulates that greenhouse gas emissions (Scope 1 and 2) will have to be disclosed and that large companies also will have to disclose emissions caused by third parties in the supply chain (Scope 3).
The UNDP Sustainable Insurance Forum is also relevant in the context of expected future developments. It represents a global coalition of 33 insurance supervisory bodies and regulators that intends to develop insurance sector specific interpretations and answers to the new sustainability challenges for the insurance sector.
So far, the majority of regulatory requirements for sustainability disclosure for Swiss insurers are still on a voluntary basis and follow the principle of proportionality. However, it is to be expected that these will be continuously harmonized and expanded and will therefore soon become relevant for insurance companies of all sizes. Insurers should prepare for these reporting requirements with foresight and not wait until they become legally binding.
Response to the increased disclosure requirement
Reliable sustainability disclosure must be well thought through and aligned with the corporate strategy to not only ensure a uniform external impact, but also a continuous improvement of disclosure. The information gathered in the reporting can be used to define strategy, manage risks and achieve a stronger and more sustainable performance in the long term.
One of the challenges in sustainability disclosure is data management, in particular the sourcing and quality of sustainability data from various external and internal data sources as well as the consistent calculation of key figures. Insurers must carefully select the right external data providers and make sure that data quality is adequate for disclosure purposes. The rapidly growing number of external data providers, as well as the requirements for disclosure, are increasing the complexity in the collection and use of sustainability data. A strategic end-to-end design and implementation of the disclosure process offers the opportunity to link this directly with the sustainability data strategy and leverage any possibilities for automation.
Accountability for the disclosure process within the organization is an equally crucial question. At present, no uniform trend can be identified in the Swiss insurance industry in this regard; this means that the process is located either in a dedicated sustainability team or in the risk, finance or communications department. Irrespective of this, early coordination with other organizational units is necessary to create synergies and avoid redundancies and inconsistencies. Regulatory developments and possible future requirements, such as the RBI or developments under IFRS) that require sustainability disclosure as part of an insurer's financial reporting or regulatory disclosure must also be taken into account.
Trust in sustainability reporting is becoming increasingly relevant from a client's and investor's point of view, as more and more questions about the depth and reliability of the disclosures are expected. Insurers must be able to explain how they are taking sustainability-related aspects into account, dealing with the associated risks and expanding their processes to prevent and combat greenwashing, for example. To strengthen trust, sustainability reporting should be underpinned by robust governance, processes, controls and data and be audited independently.
In the case of international insurance groups, timely coordination and consistency in the disclosure by the group and within the various legal entities must also be ensured. Since foreign requirements are, in many cases, already more advanced than the Swiss ones, globally active insurers must define their group strategy for sustainability reporting at an early stage and ensure that local units are consistently adopting it and that no inefficiencies arise from independent local processes that could be governed directly by the group.
Opportunities and risks for insurers
In addition to meeting regulatory and legal requirements, insurers can use comprehensive sustainability disclosure as an opportunity to position themselves to the public and to show that they are making their contribution to a more sustainable economy and to climate protection. The disclosure of innovative products and sustainable investments, as well as of progress in reducing their own CO2 footprint and in other sustainability aspects, can be a decisive distinguishing feature for clients and investors.
However, besides the competitive advantage of incorporating sustainability, many risks arise as well. Insurers must pay attend to create objective and consistent disclosures to mitigate, for example, the risk of greenwashing or other reputational risks and therefore avoid costly consequences.
The regulatory frameworks, recognized disclosure standards and industry-specific guidance documents assist with this. In particular, the disclosure of sustainability activities and key figures in accordance with uniformly defined, measurable criteria promote transparency and comparability in the marketplace. In order to meet increasing regulatory requirements, the sustainability disclosure process should be sufficiently thought through and scalable, so that there are fewer cost-intensive process adjustments downstream.
In addition, pricing and the dedicated consideration of sustainability factors can also pose a challenge for new products, so that they are competitive as well as transparent and so that there is conscious communication that not all new risks are insurable.
Ultimately, it should not be forgotten that strategic design and implementation of the sustainability disclosure process can be a major initial effort. In the long run, however, it will pay off.
Summary
The focus of the international community and regulatory developments in sustainability create new challenges for insurance companies. They are also being held responsible at both a societal and political level for gaining a better understanding of sustainability risks and taking sustainability factors into account. Consistent reporting should enable insurance companies to create greater transparency on their sustainability journey.
Acknowledgment
We thank Johanna Hetzmannseder for her valuable contribution to this article.
