Library: EY – How insurance CFOs can embed ESG into finance and the wider business

Executive summary

Sustainable finance considerations are shifting to the forefront of the CFO agenda faster than insurance finance leaders have anticipated.

CFOs play a growing role in sustainable finance considerations

In brief

• CFOs are playing an increasing role in driving sustainability as key decision makers in capital allocation, and as owners of non-financial and financial data.
• The shift to mandatory climate reporting is an opportunity for finance teams to take a leading role in advising the business on how to create long-term value.
• It will be critical to effectively navigate through a number of competing frameworks to strategically measure ESG performance and steer business decisions.

Insurers have an opportunity to adopt business models that generate long-term value (LTV) for their customers, investors, employees and the wider community. Those who emerge as market leaders will be laser-focused on better protecting society, developing new products for the next generation of customers and redirecting capital to aid the transition towards net zero.

It is crucial for them to act quickly to embed environmental, social and governance (ESG) into existing business as usual (BAU) processes, not only given regulatory developments and mandatory reporting, but also because this is the right thing to do.

The finance function should be front and center in driving the business to deliver on its strategic sustainable finance ambitions. It plays a leading role in communicating the contribution of insurers to society with the use of key metrics, and in developing incentive programmes that drive concrete sustainability outcomes. It is critical for insurance CFOs to use their influence to design an approach to meet stakeholder reporting needs efficiently and to steer the organisation towards achieving its goals.

Key priorities for the finance function

The CFO plays four critical roles :

1. Co-develop the sustainability strategy of the business to focus on LTV and maintain financial resilience.
2. Rethink the capital allocation strategy to drive business agility, resilience and LTV, for example, by redirecting capital to sustainability-enabling projects.
3. Establish a controlled, efficient and transparent sustainability measurement framework and operating model to monitor and report internally and externally on ESG risks, opportunities and performance.
4. Drive a robust and well-controlled stakeholder narrative around sustainability, including the organisation’s purpose and its link into the broader contribution of the insurance industry to society.

These are among the key priorities and opportunities we explore in our latest publication.

Sustainable finance: considerations for the insurance CFO.

Climate reporting: from voluntary to mandatory

Insurance CFOs should embrace the shift from voluntary to mandatory climate reporting as an opportunity to take a leading role in advising the business to create LTV. Climate reporting requirements are becoming increasingly relevant to policymakers as a means to ensure formal assessment of sustainability risks and opportunities. Recent milestones from the EU 2018 sustainable finance action plan demonstrate the shift from voluntary to mandatory climate reporting.

An evolving European regulatory reporting and policy landscape

• In April 2021 the European Commission adopted a proposal for the EU Corporate Sustainability Directive (CSRD). The proposal introduces more detailed reporting requirements, with companies required to report under mandatory EU sustainability reporting standards.
• Mandatory climate reporting will apply in October 2023 for all large EU companies under the CSRD.
• EU Sustainable Finance Disclosure Regulation (SFDR) came into effect in March 2021, which requires financial market participants and financial advisers to assess and publicly disclose ESG considerations.
• The European Insurance and Occupational Pensions Authority (EIOPA) is currently consulting on the use of climate change risk scenarios in the Own Risk and Solvency Assessment (ORSA), with guidance expected to be published June 2022.

Acceleration in the development of ESG reporting standards

ESG reporting is often confusing due to the variety of competing frameworks that insurers need to navigate. CFOs play a pivotal role in identifying the relevant reporting frameworks. The reporting decisions are critical to the success of strategically measuring and monitoring performance.

As expected, at the COP26 climate change conference held in November 2021, the IFRS Foundation Trustees formally announced the creation of the International Sustainability Standards Board (ISSB).

The IFRS Foundation have set out an ambitious timeline in which they aim to release the first set of draft standards for comment in the first quarter of 2022, and to have a climate-related disclosures standard and a standard on general requirements for sustainability-related financial disclosures ready for use in the second half of 2022. More immediately, the Task Force on Climate-related Financial Disclosures (TCFD) is gaining momentum across the globe, and is becoming mandatory for a number of countries including the UK, Switzerland, Canada and Hong Kong. Below are key disclosures considerations for insurers across each of the four TCFD pillars, which are all underpinned by specific data and reporting requirements.

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