How has the insurance sector reacted to mandatory climate change reporting?

How has the insurance sector reacted to mandatory climate change reporting? | Insurance Business New Zealand

How has the insurance sector reacted to mandatory climate change reporting?

New Zealand recently became the first country in the world to introduce a bill which would require banks, insurers and investment firms to disclose the impact of climate change on their business. The bill has been since welcomed by the Insurance Council of New Zealand, which said that it is ‘very important’ for insurers to be able to identify the extent of their climate risk exposures.

Commenting on the bill, Commerce and Consumer Affairs Minister David Clark said it would be an important part of helping New Zealand transition into a low-carbon economy, and would also show global leadership in the fight against climate change - something he said will be “hugely valuable” to the low emissions economy that the world is striving towards.

ICNZ made a submission on climate related disclosure back in 2019, and chief executive Tim Grafton said that the insurance sector has been supportive of the idea for a long time - especially since it deals entirely in analysing, managing and responding to risk.

“We have always felt that it was important for investors to see the clear signals around climate change risks, and to have that priced so that there could be an efficient allocation of capital,” Grafton told Insurance Business. “This would ensure a smooth transition to a low-carbon economy.”

Read more: NZ bill to require financial firms’ climate change reporting

“If we don’t have disclosure of climate-related risks in the financial sector, then we’re operating blind,” he explained.

“Insurers specialise in the area of risk and accepting risk, so it’s very important that they are able to identify and report their physical exposure to climate change. That can be around the properties that they underwrite which may be more exposed to the effects of climate change, or the investments that they make in assets that may also have that exposure. Those two areas are quite critical.”

ICNZ is currently consulting with its members on the bill, and is expecting to make a submission to Parliament soon. Grafton said that while the overall principle of the bill is being supported, there are some ‘challenges’ around its implementation that the insurance sector will look to clarify before the requirements officially become law.

“There are some issues and challenges in the timing of the bill and the implementation of the new regime,” Grafton said.

“For insurers, it represents a more complex set of challenges than it might for other sectors, because they face three different types of climate-related risks. There are the physical risks, the investment risks and the liability risks, and those areas are far more demanding when it comes to providing some form of integrated reporting.”

“The Bill doesn’t tell us the standards to which the sector will have to report, and that will be developed by the External Reporting Board (XRB),” he continued.

“We will obviously want to engage with them to ensure that the reporting standards make sense for the general insurance sector, but the XRB will not be publishing its standards until well into 2022 - several months after this legislation is set to be enacted.”

Grafton said this delay means insurers won’t know the specifics of how they’ll be expected to make their reports until after the legislation has been passed. Despite this, he noted that the penalty regime for non-compliance will kick in immediately.

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“It’ll be very difficult to know exactly what we’ll be required to do, and yet the legislation sets out some very clear and harsh penalties for non-compliance,” Grafton said.

“My question is how appropriate that penalty regime would be if we’re moving to be the first in the world to report on a mandatory basis, and if there are going to be challenges around how we can report in a fully comprehensive and compliant way.

“It will be a learning process, and that’ll be one of the issues that we will want to carefully consider and reflect on in our submission.”

The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill passed its first reading on April 15, and is currently before the Select Committee.

Minister David Clark said the bill is a good start towards fully understanding the climate risks faced by the financial sector, but said there is still a ‘long way to go.’

“It is important that every part of New Zealand’s economy is helping us cut emissions and transition to a low carbon future,” he commented. “This legislation ensures that financial organisations disclose, and ultimately take action against, climate-related risks and opportunities.

“Many businesses face significant physical and transitional risks relating to climate change, and while some businesses have started publishing reports about how climate change may affect their business, strategies and financial position, there is still a long way to go.”