Climate and sustainability considerations for UK insurers

The first round BES exercise aimed at testing the resilience of the current business models of the largest banks and insurers, and the financial system to the physical and transition risks from climate change. The second exercise further explored participants’ strategic responses to the three scenarios published as part of the first round and the associated implications for their business models. The deadline for second round submissions was 31 March and the Bank of England expects to publish the results in May 2022. 

UK Green Taxonomy

The development of the UK Green Taxonomy will have similar objectives to the EU Taxonomy which are as follows:

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems

To be UK Taxonomy-aligned, an economic activity must:

• Make a substantial contribution to one of the six objectives (determined by satisfying certain Technical Screening Criteria (TSCs) that will be identified for each economic activity included in the UK Taxonomy).
• Do no significant harm to the other objectives.
• Meet a set of minimum safeguards, such as aligning with the Organisation for Economic Co-operation and Development (OECD) and UN guidelines.

The first two criteria were subject to consultation in the first quarter of 2022. The remaining four are scheduled for consultation in the first quarter of 2023. This closely follows the EU approach with the release of the first two in advance of the four remain objectives.

Sustainability Disclosure Requirements (SDR)

The UK is in the process of developing Sustainability Disclosure Requirements (SDR). A discussion paper was published in November 2021 and outlined the two standards and frameworks the SDR is being built on:

• A global baseline reporting standard for sustainability, yet to be developed by the International Sustainability Standards Board (ISSB); and
• The TCFD recommendations and their four-pillar structure of strategy, governance, risk management, and metrics and targets.

SDR is expected to set out a single, standardised framework of three types of climate disclosures with certain similarities to the disclosure regime of EU’s Sustainable Finance Disclosure Regulation (SFDR) and the proposed Corporate Sustainability Reporting Directive (CSRD):

1. Corporate disclosure for companies (including those in the financial services sector).
2. Disclosure for asset managers and owners that deal with assets on behalf of clients, disclosing how sustainability is taken into account in decision-making processes.
3. Investment product disclosure for the creators of investment products to report on the sustainability impact of such products.

SDR will require the disclosure of plans to reach net-zero.

The SDR will eventually replace the existing frameworks over the next two to three years.

Sustainable Finance Labels

The FCA published a discussion paper on the Sustainability Disclosure Requirements and investment labels in November 2021. Two approaches to labels are being considered:

• Only apply labels to products that make sustainability claims or that are marketed as being sustainable.
• Implement a classification and labelling system that covers the full range of investment products available to retail consumers.

The classification and labelling system would consist of five labels: not promoted as sustainable, responsible, transitioning, aligned, and impact.

Policy proposals are expected to be issued for consultation in the second quarter of 2022.

Task Force on Climate-Related Financial Disclosures (TCFD)

Mandatory TCFD-aligned disclosures are expected to be passed into law in April 2022 with a view that they will be mandatory across the UK economy by 2025.

Over 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information aligned to the TCFD recommendations on a mandatory basis.

At the end of December 2021, the following regulated firms already had climate-related disclosure requirements aligned with the TCFD recommendations:

1. Premium listed companies
2. Issuers of standard listed shares and global depositary receipts (GDRs)
3. Asset managers
4. Life insurers FCA-regulated pension providers

ISSB Consultations

The International Sustainability Standards Board (ISSB) has launched consultations for its two first proposed standards on sustainability and climate-related disclosure requirements. The ISSB was established at COP26 to address the demand for high quality, transparent, reliable and comparable reporting by firms on climate and ESG matters from investors and various stakeholders. The proposals were built on the TCFD recommendations and derived from the Sustainability Accounting Standards Board (SASB) standards. The consultation closes on 20 July 2022.