Identifying and mitigating Greenwashing risk: Considerations for insurance firms | Deloitte UK has been saved
Limited functionality available
The past 12 months have seen governments, industry and regulators outline measures to further promote the financial sector’s role in combating climate change and deliver on Paris-aligned transition plans.1 However, greenwashing has become a key and growing concern for regulators as more firms are making Net Zero commitments, announcing targets, and designing ‘green friendly’ products to help meet them. Regulators have made it clear that greenwashing is now a ‘material risk’ and supervisory action will be taken against firms found to be misleading customers, investors and other key stakeholders over the sustainability of their product offerings or transition plans.
As we have outlined in our previous blog, greenwashing risks emerge in a variety of risk categories, such as strategic, legal, compliance, and reputational risks. The insurance industry must identify, monitor, and manage these risks and their potential drivers carefully.
Greenwashing risks for insurers are heighted as a result of:
Insurers are both able to be the source of greenwashing, via the disclosures and representations they make to the market, and exposed to greenwashing from inadequately mitigating risks arising from reliance on third parties such asset managers. This can manifest itself in three key ways:
1. Ability to understand, select and price risks in underwriting
An increasing number of insurers have outlined plans to exclude or restrict underwriting activities for carbon intensive industries, such as thermal coal mines, oil sands, or Arctic energy exploration activities. Many insurers are also starting to make ‘Net Zero’ underwriting commitments to decarbonise their portfolios. These can be based on identifying insureds that make a minimum percentage of their revenue from carbon intensive activities. However, without agreed definitions for these activities or globally recognised frameworks to support consistent monitoring and reporting, this increases the risk to insurers of inadvertently greenwashing. Currently, many insurers do not have the data or granular understanding of these risks in order appropriately mitigate greenwashing risks. Further, excluding whole regions, industries, or classes of business also risks excluding firms with credible Net Zero transition plans who may be critical to the decarbonisation of the global economy. Many insurers recognise these challenges and are seeking to adopt more flexible ‘enablement’ approaches with clients that favour engagement and guidance over exclusion. However, insurers must demonstrate robustly how these approaches align to their own climate strategies and Net Zero commitments and engagement must not be used as an excuse to maintain current business relationships with high-carbon industries.
2. Understanding exposures in investments
The FCA states that the ‘sustainable’ label is applied to a very wide range of products, some of which do not have obvious sustainability characteristics’.2 The UK regulator wants to prevent situations where greenwashing risks are not identified properly in the sales process, which would lead to investors and customers being misled or mis-sold products that do not meet their needs. We are seeing insurance companies enhance their product governance, distribution and delegated authority oversight frameworks to include these considerations.
Insurers are also exposed to actions of their asset managers and the asset management industry in this space as are the clients who may be mis-sold green products. With over £1.8 trillion of assets under management, equivalent to 25% of the UK’s total net worth, developments and greenwashing risks can have significant implications for the UK economy if inadequately mitigated.3 This is particularly the case as insurers increasingly make Net Zero commitments to decarbonise their investment portfolios. This reinforces the importance of insurers having a framework to test the robustness of, and hence reliance on, ESG disclosures made by their asset managers.
3. New Products / Misleading Clients
The FCA’s Dear AFM Chair letter, outlined how existing guiding principles developed by the FCA can be considered by firms in the design, delivery and disclosure of sustainable investment funds. Of these principles, PRIN 2.1, Principle 7 of the FCA’s principles of business should be considered by insurers to clarify if and how their product’s environmental and social objectives are pursed and to do so in a way that is “fair, clear and not misleading.”4 As the market looks to issue new sustainable products, the risk of inadvertently greenwashing is heighted. Life insurers are particularly exposed if they make claims that pensions funds a ‘green’ or ‘sustainable’ and while still nascent, there is growing evidence of sustainable products from General Insurers, particularly in personal lines space with sustainable claims policies.
There are a number of actions firms can take to identify and mitigate the potential for greenwashing or a perception of greenwashing occurring:
The insurance industry will play a vital role in facilitating the transition, through using its unique risk identification and management skills to inform other sectors of the economy and financial services of the sustainability risks they face, and having the opportunity to deliver positive social and environmental impact through its investments and underwriting practices. By taking the necessary actions to ensure it mitigates greenwashing risks, the insurance industry can gain comfort that they are contributing positively to a Net Zero future.
1 See our stocktake of regulatory developments leading up to and during COP26.
Steve is the Head of ESG Assurance in our Audit and Assurance practice for our UK and North and South Europe partnership. Steve is a chartered accountant and has extensive experience in audit, internal audit and regulatory implementation programs. He has worked with a wide range of companies across all major industries, having developed a thorough technical understanding of products and control practices for non-financial risk management. Steve has significant experience in partnering engagements for the provision of ISAE 3000 / 3410 independent assurance over sustainability information and in relation to the sufficiency of design and operating effectiveness of processes and controls to report on non-financial information.
Chris focuses on strategic regulatory and operational change across financial services, helping clients evolve through practical and risk-based advice to major regulatory topics, as well as through the use of RegTech solutions.
Greg is a Director in Deloitte’s Sustainable Finance team. He brings over 10 years of sustainability experience in financial services, with a particular focus on insurance, strategy, data, analytics, and climate resilience. Greg was Managing Committee chair of ClimateWise and on the Board of the UN Principles for Sustainable Insurance. Prior to joining Deloitte in January 2021, he was Global Head of Resilience and Sustainability at Aon, having started his career in investment banking. Greg holds an MSc from the London School of Economics.
Joey is an assistant manager in Deloitte’s Financial Services Assurance group. He has experience in audit and regulatory assurance roles with clients primarily in the insurance industry but also in broader financial services including banking and asset management. Joey specialises in emerging regulatory risk, particularly the financial risks from climate change and Environmental, Social and Governance (ESG) risks.