As society’s risk manager, the insurance industry has a long history of embracing practices that protect people and society from systemic threats, but as climate threats have ramped up dramatically, most insurers have been slow to adjust their business practices to reduce exposure to climate risks and help policyholders and governments to reduce their exposure.
It’s never been more clear that our communities are under siege from the physical impacts of the climate crisis. Residents of Lake Tahoe evacuated to avoid the Caldor fire, and California’s 7,000 wildfires have already burned nearly 1.8 million acres this year, destroying almost 3,000 structures. And on the same weekend the U.S. reflected on the anniversary of Hurricane Katrina, New Orleans was besieged by Hurricane Ida, which left more than 1 million residents without power and may have unleashed $25 billion to $35 billion in insured damages. In the face of these growing climate threats, the insurance industry faces not only increasing underwriting and liability exposure, but risk to its investments and financial assets too.
The Biden administration has shown it’s serious about mitigating the financial risks of climate change. Just recently the Federal Insurance Office began soliciting public comment on the insurance sector and climate-related financial risks. Insurers must be proactive in understanding their own exposure, their clients’ exposure and their own power to affect this global, systemic crisis.
I recently joined three leaders: Butch Bacani, program leader of UNEP’s Principles for Sustainable Insurance Initiative; Ben Harper, head of corporate sustainability for Zurich North America; and Jennifer Waldner Grant, chief sustainability officer for AIG, to discuss this growing need for insurance companies to get serious about their disclosure strategies.
Bacani, Harper and Waldner Grant agree the disclosure framework created by the Task Force on Climate-related Financial Disclosures (TCFD) is becoming essential for insurance companies in developing and implementing improved disclosures, as well as in meeting the net zero agenda. The TCFD is unique among frameworks in its usefulness in structuring an organization’s risk management systems: by requiring companies to look under the hood, it shapes how they view sustainability from both governance and risk perspectives and can inform an entire sustainability strategy through consideration of these factors. And, the TCFD’s recent public consultation focused on transition plans and portfolio alignment broadened its scope to include the net zero agenda, which addresses climate change’s root causes and not just its impacts.
In the face of these growing climate threats, the insurance industry faces not only increasing underwriting and liability exposure, but risk to its investments and financial assets too.
But the TCFD, endorsed by G-7 Finance Ministers and more than 2,000 companies, including financial firms managing more than $138 trillion in assets, isn’t just the leading international standard for climate reporting across industries, including insurance: It has become the standard that countries turn to as momentum grows globally for mandatory climate risk disclosure.
Bacani, Waldner Grant and Harper agree on several key practical strategic recommendations for organizations looking to establish or improve their climate risk disclosure practices using the TCFD:
- Educate colleagues on the importance of disclosure. One of the most important things program managers can do is spend significant time in the first year helping colleagues understand the importance of disclosure. By providing transparency to the framework and strategies teams are building to assess climate risks and opportunities, they can create internal awareness and more easily secure cooperation and buy-in for future endeavors.
- Conduct gap analyses. Determine early on what can and cannot be disclosed, and let these parameters guide internal strategy conversations. This process is an opportunity to understand which elements of a company’s potential strategy are ready for formal commitments and which need more maturation; then, use the latter to build a strategy to address these "works in progress."
- Study the competition. The journey to improving climate risk management takes time, and the TCFD requires program managers to consider several climate change scenarios, which can feel overwhelming if an organization is undertaking the process for the first time. While charting the organization’s own course, examine others in the industry and benchmark against peers; their disclosures can serve as reference material to guide the team through TCFD components.
With so much potential to embrace practices that keep people safe, it’s critical that the insurance industry work within the TCFD framework to alter business practices and reduce exposure to climate risks. As the climate crisis becomes more pressing, so too grows the need for insurance companies to take meaningful actions quickly and strengthen them in the future.