The world’s most important regulatory body in stock trading, the US Securities and Exchange Commission (SEC), is proposing that US listed companies disclose a range of climate-related risks and greenhouse gas emissions.
A Reuters news article described the US initiative as “landmark.” Public comment on this proposal closes later this month. What are the implications for Australian insurance companies?
“They’re obviously the biggest economy and they’ll influence many other economies but they’re not the first,” said Ramana James (pictured above), executive general manager of safer communities at Insurance Australia Group (IAG).
James, who reports to the IAG executive and board on developing and delivering on sustainability issues, said multiple jurisdictions around the world are considering similar proposals.
“However, the US proposal, because of the size and scale of that economy would have an impact that is obviously quite significant,” he said.
“New Zealand will be bringing in mandatory climate disclosures from FY24 onwards and the UK has a draft out where they’re seeking comment because they’re looking to do something similar as well,” added James.
He said, some insurers, including IAG, have already aligned their climate related disclosures and financial risks to the guidelines set by the Task Force on Climate Related Disclosures (TFCD). The TFCD’s recommendations, he said, are similar to those in the SEC’s proposal.
The TFCD is chaired by American businessman and philanthropist Michael Bloomberg and consists of about 30 official members from across the G20. The members include insurance giants Swiss Re and AXA. The group’s aim is to promote more market transparency through the accurate disclosure of climate risks. According to its website, more than 3,000 organizations across the world have expressed support for its recommendations.
James said the organizations that support the TFCD are using it “as the governing structure for their expectations around those disclosures.” He said IAG had been disclosing its climate related risks for a number of years.
“We’re in a really good position because we’ve already been disclosing using the TFCD guidelines,” he said. “Even if Australia, for example, were in the future to bring in a mandatory climate related disclosure requirement we’re well positioned to be able to do that,” added James.
He also said that because IAG operates in New Zealand, where mandatory disclosures are due to come into force, his firm will be essentially doing what the SEC is proposing, “regardless” of what happens in Australia’s regulatory environment.
James pointed to another important initiative in the sustainability space that the insurance industry should be aware of.
“The International Sustainability Standards Board (ISSB) was recently formed which has merged multiple guidance and standard type bodies,” he said.
In November last year the non-profit organization that oversees financial reporting standards, the International Financial Reporting Standards Foundation (IFRS) created the ISSB. The aim was to help meet the rising demand for sustainability-related disclosures by providing a global baseline of standards.
“It’s creating, for the first time, a more singular view of what sustainability disclosure standards should look like and using a similar structure and methodology to what the TFCD has built but looking at that for broader sustainability not just the climate related piece,” said James.
James said regardless of what happens to the SEC proposal, more companies will be disclosing their sustainability and climate related risks using the ISSB’s baseline of standards.
“As they do that, you’ll start to get more consistency and a better ability to benchmark across companies,” said James.
The way insurance companies deal with climate issues is entwined with ESG (Environmental, Social, Governance) indicators. ESG indicators are also a way for investors to assess how companies are dealing with climate change and other factors that have recently increased in importance in relation to employee engagement and the composition of boards.
Recently, ratings agencies have started to take more notice of ESG factors as an influence on their credit ratings. At the end of last year, S&P Global, one of the world’s biggest credit ratings agencies, released its first ever report detailing the ESG factors impacting insurers.
“We know that climate and ESG issues are resulting in investors losing tens of billions of dollars - known fact - and it will get worse as the environment gets worse,” said Sydney based David Howard-Jones, partner in Oliver Wyman’s Global Finance and Risk practice.
