Posted: 01 Mar. 2021

Insurers must make climate change a top priority

Organisations are increasingly focused on Environmental, Social and Corporate Governance (ESG). More than ever, investors, customers and employees include these factors in their decision-making. In the first of a new blog series, we look at what this means for New Zealand’s insurance industry.

In September 2020, Minister for Climate Change James Shaw announced the government’s intention to make reporting on climate risks compulsory for the financial sector in New Zealand. The proposed climate reporting requirements will apply to licensed insurers with more than $1 billion in total assets under management or annual premium income greater than $250 million. It will also apply to most banks and fund managers as well as all equity and debt issuers listed on the NZX.

New Zealand’s new requirements will likely be based on the framework proposed by the Taskforce for Climate-Related Financial Disclosures (TCFD). The framework is based on four pillars: governance, risk management, strategy, and metrics and targets. A key focus will be on an entity’s resilience under different future climate-related scenarios. The TCFD recommends presenting impacts from a scenario assuming global warming up to 2oC, plus two or three other scenarios relevant to the entity’s operations and risk.

The effective date for mandated disclosures will be in 2023 at the earliest. However, recognising the transformational challenge for their organisations, a growing number of insurers have already started making climate-related disclosures within or alongside their annual reports.

The External Reporting Board (XRB) will be tasked with developing one or more reporting standards. The Ministry for the Environment (MfE) has been asked to develop guidance on climate scenario analysis to form part of the disclosures.

TCFD considers both risks and opportunities of climate change in light of physical and transition risks. Physical risks are those that will directly, physically, impact a business, such as the increased likelihood of coastal flooding due to sea level rise. Transition risks are risks associated with changes to markets and economies from actions taken to reduce climate change, such as the cost of adopting cleaner energy sources. Transition risk also includes the reputational risk of being associated with industries seen as producing high levels of greenhouse gases. In addition, there is a litigation risk that directors could be sued for knowingly undertaking activities detrimental to the environment. Chapman Tripp’s 2019 legal opinion notes the extent to which directors in New Zealand can - or must - consider climate change in their decision making.

New Zealand is already seeing examples of physical and transition risks. Climate Sigma recently released a report on sea level rise and the withdrawal of residential insurance. They reported that with only small increases in mean sea level, insurance costs will increase significantly within just 15 years, leading to insurers reducing available cover or looking to share more of the risk with policyholders. In the meantime, New Zealanders continue to move to, and build upon, flood prone areas.

Meanwhile, banks and insurance companies increasingly publish responsible business polices noting sectors they will no longer work with in the future. Coal and other carbon-based industries face a very real transition risk, right now.

We recognise that climate change is a long-term issue that may not seem to impact businesses now. However, businesses will come under increasing pressure from shareholders, suppliers, customers and employees to present genuine green credentials. The sooner entities consider risks and opportunities, the easier it will be for them to mitigate their impact. As Minister Shaw said last year, “Why wouldn’t you want to know what those risks are?” The important step will be to start considering those risks now.

The XRB and MfE plan to consult on this critical topic over the coming year. Watch out for opportunities to attend discussion sessions and respond to consultation documents to have your say on this important matter.

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Darren Fleming

Darren Fleming

Director - Actuarial Services

Above all things, I am passionate about delivering high quality advice to my clients, be that helping them to solve their insurance product and pricing challenges or in meeting their regulatory requirements. I am a qualified actuary and have worked in the pensions and life insurance industries for more than 20 years, 10 years of which were in the UK. I have an interest in climate change and am keen to leverage my actuarial skills in modelling long-term outcomes in this area.