Rising to net zero challenge is necessary learning curve for investors

Climate and Sustainability Heads say that achieving net zero in the UK will require participation and perseverance with TNFD and SDRs, despite pains.

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Building strong foundations in the industry key to achieve net zero, says Legal & General's Wendy Walford.

In a spirited panel debate on the future of climate change and sustainable investment in the insurance sector – and how companies can rise to the net zero challenge – senior insurance figures said that working with reporting regimes can be a difficult balancing act, but is an unavoidable learning curve that investors must learn to navigate.

The panel, which took place at Insurance Investor Live Europe 2023 in London on 26 January, featured Hetal Patel, Head of Climate, Phoenix Group, Ben Howarth, Chief Sustainability Officer, Association of British Insurers, Wendy Walford, Head of Climate Risk, Legal & General, and Mark Guirey, Executive Director, MSCI.

"We have to build the foundations today for the long-term transition
to come through."

Walford was quick to note the significance of time horizons when it comes to ESG investment goals. She called the ongoing threat of climate risk a “slow burn”, saying that organisations need to manage big ticket items that will most directly impact their balance sheets while also looking at the underlying sustainability landscape. “We have to build the foundations today for the long-term transition to come through,” she said.

She added that because the scale of the net zero challenge is so immense and exact guidelines can often be ambiguous, it is important to find the right type of investments, assess new asset classes, and ensure that you are financially supporting the solutions.

Are reporting regimes working? 

The panel said that “reporting fatigue” was a real issue and that more had to be done to make the legislation less of an alphabet soup and more applicable to the day-to-day operations of investment teams. Patel said the sentiment is still prevalent, particularly when it comes to Sustainable Disclosure Requirements (SDRs) and the framework provided by the Taskforce on Nature-Related Disclosures (TNFDs).

TNFD, for example, finally released the third version of this beta framework for market consultation in November 2022 – which aims to “develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks and opportunities”.

“Top-down change is important because that’s when things become a
priority in the boardroom.” 

A complete list of recommendations will be published for market adoption in September 2023. But the constant recalibrations mean many in the industry are also expressing frustration at what they see as inconsistent regulations.

For investment teams at insurance firms, this means that getting reporting regimes right requires a carefully-calibrated balance. Reporting cannot just be about “stylistics”, Patel added. “Regulation in this space is a good thing. Top-down change is important because that’s when things become a priority in the boardroom.”

Howarth said that when it comes to climate change concerns, insurance companies are uniquely positioned to consider the issue from a long-term perspective and over a wider time horizon. “We need to understand climate risks far into the future,” he said.

He continued that understanding the differences between climate risk and ESG is important – and that these concepts are frequently mixed up and misunderstood. “It’s tempting as a sector to get lost in all these reporting initiatives,” he said, which echoed Patel’s concerns. “To actually have an impact, we need to think about the effect these measures will have on people’s daily lives.”

When it comes to SDRs, Howarth said that getting the nitty gritty details of the reform right is going to be a difficult job. “They are trying to say: here are some common concepts everyone can get behind. We need to coalesce around the same language, but it won’t all be understood on day one,” he added. Patience and persistence will be important postures as organisations work to figure it all out both individually and as a larger industry, but he said he was hopeful.

A balancing act 

Guirey came down on the less sanguine side of the debate, saying that he believes meeting net zero goals and getting reporting regimes in line will be a fundamental difficulty for the industry as a whole.

“There are two sides of the balance sheet, and the insurance industry
 is impacted on both.”

Because of this, he said, it is important to begin imperfectly (rather than pontificate) and then reflect on where things are headed and what is most critical to achieve when it comes to accurate data, satiating appetite, and perfecting disclosure. “There are two sides of the balance sheet, and the insurance industry is impacted on both,” he said. “We have to consider the risks that are underwritten and the assets that are managed.”

Walford urged the importance of looking at sustainable investment products, and how clear language and accurate details were and will continue to be paramount - but was hesitant to ascribe specifics about what this meant for businesses, and what each would need for its own processes. “There needs to be genuine differentiation between categories,” she said, and agreed with Howarth that it will be a significant learning process and not all will immediately fall into place.

Walford added that it’s not just about the labelling of funds, but the fact that companies must have the metrics to meet these criteria. “You need to ask: are the investee companies enabling you to make this change,” she said.

UK versus EU legislation 

Howarth pointed out that it has been a tricky balancing act between the EU and the UK, and a difficult winter in terms of energy efficiency. He said he hoped the UK government would focus on making buildings energy efficient. “This is critical, as financial services can’t report on information they just don’t have,” he continued.

“You set a target and see where you are, which works as long as there is
a feedback loop so you know what is working and what is not.”

A January 2023 S&P Global report on key sustainability trends driving change in 2023 echoed these sentiments. “The global energy landscape shifted in 2022 with record prices and supply disruptions related to the Russia-Ukraine war,” the report said. It added that the picture looks especially complicated in Europe in 2023 due to new investment in liquefied natural gas and a slower phaseout of coal and how this is challenging decarbonisation plans, which is partly due to the fallout from the Russian invasion.

Patel said that what is actually needed to achieve net zero is a clearer direction when it comes to SDRs. “We need a direction otherwise people go off to their own devices and you can’t have apples-to-apples comparisons.”

He added that speed bumps are a part of the process: “you set a target and see where you are, which works as long as there is a feedback loop so you know what is working and what is not.”