Brussels, 12 April 2024 – A new report from Finance Watch outlines the steps that must be taken to ensure effective implementation of mandatory transition plans for insurance companies as tools to support transition and manage the related risks.
It outlines the urgent need for supervised “prudential” transition plans, pointing to the financial instability that will unfold if insurers continue operating as they do today, as well as the burden uninsured losses resulting from climate change can put on taxpayers.
Finance Watch argues that target setting, corporate governance, a focus on decarbonising the real economy, engagement with investees and clients, and transparency are integral to insurance transition planning.
Finance Watch, the non-profit association dedicated to reforming finance in the interest of citizens, has today released a new report summarising the steps to making mandatory transition plans for insurance companies operating in the EU an effective tool to accelerate on the path to net-zero.
Climate transition plans are action plans describing how an organisation will pivot its strategy and operations to align with climate science, thus supporting the sustainable transition and limiting risk to the financial system. According to Finance Watch, mandatory, science-based transition plans are essential to making insurers contribute to the transition of their clients and the companies they invest in, as well as phasing out investment in unsustainable activities showing insufficient transition progress. Activities like fossil fuel extraction, which cannot transition, exacerbate climate risk, resulting in increased insurance claim payouts and a widening protection gap.
To illustrate the urgent need for mandatory transition plans, Finance Watch points to data from Carbon Tracker showing that 77% of current fossil fuel reserves should remain unexploited. The potential value loss of these so-called ‘stranded assets’ could amount to 11 trillion USD by 2050, a danger to financial stability.
Reinforcing the need for transition planning as a risk mitigation tool is the growing protection gap. This is the number of losses due to climate-related events that are not insured. Data from the European Insurance and Occupational Pensions Authority (EIOPA), highlights the scale of the problem in the EU: only 23% of weather-related losses in Europe are insured.
Looking to the United States, the rapid increase in natural catastrophe exposure has made underwriting new contracts in certain regions economically unviable for some insurers, leaving citizens and businesses without the coverage they need. Such drastic action pushes the burden of climate change on society and undermines the viability of an insurer’s business model. Moreover, it can destabilise the economy by increasing the financial pressure on policyholders and governments.
This report dives into the most critical aspects that will shape transition planning as a powerful tool for insurers to mitigate climate-related transition and physical risks. It outlines key factors in insurance transition planning: target setting, corporate governance, facilitating the transition of the whole economy, engagement and transparency. The report also touches on the role supervisors can and should play in both guiding and monitoring the path to success.
It explores the rules currently on the table at EU level that will make or break the effectiveness of transition planning for insurers and other financial institutions, namely Solvency II and the Capital Requirements Directive (CRD). Introducing harmonised transition plan requirements in these rules can prevent overlaps with disclosure and due diligence requirements, reducing legal uncertainties. Such requirements also ensure all institutions are on an equal footing when applying sustainability requirements.
Notes:
- For further details on how this new report connects with Finance Watch’s work on the wider EU sustainable finance agenda, please see the Finance Watch report, A Finance Watch guide to the next ‘sustainable finance agenda’.
- For an overview of work on transition plans being undertaken at EU level, please read the Finance Watch blog, Europe must harmonise its patchwork of transition plan requirements.
- To arrange an interview with Nikolas Geirnaert, Research & Advocacy Officer at Finance Watch, please contact Pablo Grandjean at pablo.grandjean@finance-watch.org or call on +32 / 2 880 0442
