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Environmental, social, and governance reporting in insurance
Environmental, social, and governance (ESG) transformation will require organizations to be more aware of the risk of climate change and have a greater sense of social responsibility. Learn more about ESG at the governance level and why it’s important for insurers to set the tone at the board level to enforce sustainability of ESG in governance and internal controls.
Disclosing climate-related risks
On March 21, 2022, the Securities and Exchange Commission (SEC) released a proposed rule to regulate the disclosure of climate-related risks across public companies. The rule requires public insurers to include climate-related disclosures in their registration statements and reporting, including climate-related risks that are likely to have a material impact on the business, results of operations, or financial condition. This would include disclosure of greenhouse gas (GHG) emissions.
While the comment period has closed, the SEC received almost 15,000 comments related to the proposed rules. With this high response rate, the discussion of the rules is prevalent throughout the industry. If passed, it should lead to greater consistency and comparability of emissions and climate-related data across companies, industries, and locations.
As a result of this new regulation requirement, finance teams will play a crucial role in ensuring that the existing financial reporting systems and processes are updated to include the correct information to meet the disclosure requirements. Many insurers are wondering what the best approach is to comply with this SEC rule and NAIC revision and produce financial disclosures that capture sufficient and reliable data.
Beginning with the end in mind, insurers should review and assess how the existing financial reporting architecture should be enhanced to manage these changes and what the ideal governance structure that can enable an effective climate-related disclosure would be.
Building an ESG governance body
As a part of this journey, governance bodies will play a pivotal role in establishing top-down accountability mechanisms to support the SEC proposed rules on climate change. To achieve the expected results, organizations should treat this as a large-scale change by establishing a robust plan that highlights key timelines, internal and external stakeholders, and interdependencies to allow them to manage the various projects. Having a strong governance structure can facilitate effective decision-making and balance competing priorities.
Insurers should consider building an ESG governance body that comprises a diverse team with skill sets to understand each aspect of ESG reporting requirements and their effective execution. The ESG governance body should work on integrating ESG into the overall organizational strategy by fostering a corporate culture aimed at reducing environmental risks and increasing climate resilience and by supporting corporate initiatives related to energy and environmental sustainability strategies and programs in the workplace. This can enable ESG to be an integral part of the overall corporate vision and future planning at the organization and facilitate the mitigation of risking the omission of ESG materials from regulatory filings.
Although the insurance industry (specifically property and casualty insurers) has been proactively monitoring climate risk for years, ESG transformation provides an opportunity to broaden the governance framework to include meaningful controls and processes. Many insurers have already started to align their underwriting and investment strategies with ESG principles, which in turn can help them achieve robust governance and transparency within the organization.
Considering the impact of regulatory changes
The SEC proposed rule on climate change requires insurers to disclose both qualitative and quantitative information related to GHG inside and outside the financial statements. Furthermore, the proposed rules require public insurers to include climate change disclosures in their registration statements and Exchange Act annual reports (in Management’s Discussion and Analysis) and in the notes of their audited financial statements.
One of the biggest challenges insurers will likely face is how to ensure the existence of adequate internal controls to support effective and accurate reporting of climate change-related information. Companies should revisit their control environment and determine whether they are building robust internal controls to support effective ESG reporting in the insurance industry. The following are some items to consider:
Controls around data:
- Processes are in place to provide data needed to meet ESG reporting requirements
- Processes are in place to ensure data related to GHG is available, accurate, secure, and complete
- Process is in place for data reliance on third parties
Reporting ESG data:
- Definition of ESG targets and metrics
- Structure of the report to be used for ESG metrics
- Impact of ESG targets and metrics on the overall enterprise risk assessment
- Assessment of the existing tools and their capacity to support the ESG reporting requirement
- Assessment of effectiveness of Information Technology General Controls around the technology supporting ESG reporting
Insurers should consider the impact of the proposed and adopted regulatory changes in their overall reporting. Forward-looking insurers should consider the impact of the proposed and adopted regulatory changes, with a focus on the implications on their governance and internal controls frameworks, and perform an initial assessment of their ESG reporting readiness.
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