Insurance Europe

The European Commission (EC) has continued with its very ambitious plan to use a number of sustainability initiatives to drive companies and citizens to change their behaviour and investments in ways which support the Paris Agreement objectives and wider sustainability goals. For insurers, the initiatives with most direct relevance include the Taxonomy Regulation, Sustainable Finance Disclosures Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD).

The insurance industry has highlighted the importance of the availability, and efficient access, to high-quality and consistent sustainability data to be able to develop and implement their own transition and sustainability plans. The sector has therefore been very supportive of the EC objectives. However, it has also strongly emphasised the need to develop the right data sets and key performance indicators (KPIs) and to keep in mind the operational burden and implementation costs. This is no easy task because sustainability is such a new field and the available expertise and resources are limited to develop the right measures, let alone implement them. Insurance Europe has therefore also called for a phased approach to allow time to develop appropriate requirements and to keep the implementation manageable. This is also needed so that lessons can be drawn from the initial application before any further changes are introduced.

Companies face numerous challenges in the implementation process which is well underway for many of the initiatives. This is to be expected given the newness, ambition and very significant costs and workload involved. There are already issues emerging around quality of data, overlaps in reporting requirements and concerns that some data and KPIs will need improving or refining. There is also a general recognition that users should be careful in how they use the initial information produced. However, there is also a view from the insurance industry, that a period of stability is needed before changes or new elements are added to allow time to focus on implementation of current measures and to assess what is working and what is not.

Taxonomy Regulation

European (re)insurers have supported the Taxonomy Regulation’s (EU Taxonomy) objective to create a common classification system for sustainable economic activities. An appropriate taxonomy has the potential to play a key part in the EU’s sustainable finance framework for directing investments towards sustainable projects and activities.

Insurers, who are the largest institutional investors in Europe, and other investors, can also use the taxonomy reporting from investee companies to help direct investments to the economic activities most needed for the transition, in line with the European Green Deal objectives.

This year, insurers are disclosing for the first time their own specific KPIs — an Underwriting KPI which is meant to provide information about the extent an insurer underwriting activity is aligned with the EU Taxonomy and an Investment KPI which is intended to provide information about the alignment of an its investments with the EU Taxonomy. The idea is that insurers take actions to become more taxonomy aligned, their KPIs will increase.

Insurers are still in the process of investigating how to make best use of the taxonomy reporting to guide their own investment decisions. However, there appears to be some disappointment that the EU Taxonomy output does not provide the help intended and one reason mentioned is the need for the taxonomy to better incorporate transition financing.

In terms of the KPIs reported by insurers there are several concerns.

The industry was frustrated that the EC published 70 pages of FAQs1 only days before KPIs were due to be reported. This was far too late given that all the IT and other processes had to be finalised well in advance. Furthermore, the FAQs included key guidance and new requirements going beyond what was included in the legal text and seemed to conflict with other EU legislation.

There are also concerns over the design of the Underwriting KPI. Even if the insurer met the requirements of the taxonomy criteria, the KPI would, at best, be 3 to 5%. If an insurer extended even further discounts to incentivise customers to take climate adaptation actions – something which is a key aim of the taxonomy for insurance activities – that insurer’s Underwriting KPI would go down instead of up.

There are also concerns over the Investment KPI because, according to EIOPA’s assessment2, the taxonomy regulation currently only covers about 15.5% of insurers’ investments. Therefore, the Investment KPI will also tend to automatically result in very low reported taxonomy alignment for the insurer.

The EU Taxonomy should be seen as work in progress, and it will be important to assess how best to address the various concerns being raised.

Sustainable Finance Disclosures Regulation (SFDR)

The SFDR, which was applied in 2021, is the very first key piece of the sustainability reporting framework and European insurers have invested significant resources and efforts in its implementation. The SFDR is a requirement for financial services companies to report product level, as well as entity level sustainability information. The aim is to help customers who want to buy products with sustainability-related goals get the information they need about the products and companies who provide them. As early as December 2022 Commissioner McGuinness confirmed that the EC would launch a comprehensive assessment of the SFDR implementation, recognising that “we might need to make some adjustments – whether that’s because some measures are not fully working as intended or simply to keep up with a vibrant and evolving market.”3

A fundamental review of the SFDR, including whether it should be turned into a product labelling system or remain, but be improved, as a transparency tool, is expected to start under the new EC. The EC has in the meantime already asked the European Supervisory Authorities (ESAs) to review other details such as the reporting templates and the ESAs made a range of recommendations for changes in December 2023.

Insurance Europe agrees that improvements and potentially more important changes are needed but, together with other financial services trade associations, asked the EC to avoid applying multiple changes to the SFDR framework. Adopting the changes proposed by the ESAs and then another set of changes a year or two later would most likely increase confusion for customers, undermining their confidence in sustainability focused products. It will also create significant costs that would arise from the industry having to run two implementation projects, training and IT processes. A much better approach is to wait until the outcome of the wider review and implement appropriate changes in one go.

Corporate Sustainability Reporting Directive (CSRD), European Sustainability Reporting Standards (ESRS) and the European Single Access Point (ESAP)

Insurers support the objectives of the CSRD which will be an important source of environmental, social and governance (ESG) data requiring over 50 000 large European companies to disclose a very significant set of ESG disclosures from 2024. The specific data is set out in the European Sustainability Reporting Standards (ESRS), proposed by the EC based on the advice of the independent European Financial Reporting Advisory Group (EFRAG).

The first set of standards which apply to all sectors in scope were formally adopted by the EC in July 2023. It involves around 1 200 data points which will be subject to external audit to ensure appropriate quality. It is encouraging that the EC recognised the need to give companies time to implement new requirements and decided to postpone the second set of sector-specific standards to June 2026. Implementation of the first set will already be a huge challenge, will be very costly and it is vital that this is given the time to be successful.

All this data will be available directly from each company but, to allow efficient access to the thousands of companies, the EC has launched the ESAP project. This will be a huge database containing all public reporting, including ESG data from the CSRD and many other public datasets and financial accounting information. The ESAP regulation provides for the access point to be operational for at least some data points from 10 July 2027 at the latest.

If these initiatives achieve their objectives of providing up to 1 200 data points of consistent and high-quality ESG data from over 50 000 companies, all available for free or low cost via an efficient ESAP electronic data interface, this will be an incredible achievement.

Corporate Sustainability Due Diligence Directive (CSDDD)

The recently agreed CSDDD will hold large companies responsible for ensuring that the companies they deal with along their value chains are not committing human rights and environmental violations. It will apply to companies with over 1 000 employees and with a turnover of more than EUR 450 million and to franchises with a turnover of more than EUR 80 million if at least 22.5 million was generated by royalties. It sets obligations regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities which covers companies’ upstream business partners and downstream activities partially, such as distribution or recycling. For financial services, including the insurance industry, the directive will apply to their own operations and upstream activities but not to their downstream value chain. A review clause has been included to assess the inclusion of downstream value chains for financial services at a later stage.

Another key aspect of the CSDDD is to require companies to adopt and put into effect climate transition plans which are in line with the Paris Agreement objectives to keep global warming below 2°C and ideally below 1.5°C.

Insurance Europe welcomes the new directive, in particular the cross-sectorial obligation to adopt transition plans. This is particularly important for society to transition to a decarbonised economy, but also to encourage the development of transition assets. Regarding insurers’ downstream value chain, the complexity brought by the nature of insurance activities, where the contract beneficiary is often different from the insurance client (company pensions schemes for example), or where mandatory insurance products are provided to fulfil a social role, makes its inclusion very challenging and complex in practice. The final agreement on the CSDDD reflects these challenges.

Looking ahead

With respect to rules already in place, the focus should shift to implementation of rules and assessing if they work as intended before proposing any new rules. In this respect, a holistic assessment is needed of the interaction of the different building blocks of the sustainable finance framework and assessing potential overlapping, duplicative, or contradictory requirements. This is also needed to improve the usability of the new tools (e.g. the EU Taxonomy) taking into account feedback from stakeholders from the first implementation efforts and issues identified.

As regards potential new requirements that are yet to be developed, these should be kept to the minimum, in line with the general EC ambition to streamline reporting obligations for EU businesses. The focus should be on key obligations and reporting that will have the most impact, where the benefits clearly exceed the costs and on ensuring that there is a phased approach to development and implementation of any new rules.