by Chirag Shah, Bridget Beals and Joshua Holbrook - KPMG
The Climate Transition Plan Taskforce (TPT), launched by HM Treasury, published their disclosure framework in October 2023, which requires organisations to publicly disclose their Climate Transition Plans and provides a “gold standard” for what this should contain. It is expected that the FCA will endorse the disclosure requirements and will likely prioritise listed businesses and regulated asset owners/managers for disclosure in 2026, though voluntary uptake in advance of this date is encouraged.
The new TPT requirements will operate alongside sustainability reporting obligations such as (International Sustainability Standards Board), with a particular focus on forward looking climate transition strategies including decarbonisation plans, climate risk sensitivities, integration into business strategy and financial planning. This will increase the amount of information available to investors, customers and other stakeholders which is intended to reinforce the belief in a company being a resilient and value creative business where they respond proactively, and potentially increase risks such as greenwashing for those who do not.
Below we look at what the TPT requires, what it means for insurers, both as asset owners and underwriters, and how aligning with the strategic intention of the regulation can generate tangible benefits for your business.
Climate Transition Plan Disclosure Guidance
The TPT disclosure framework is intended to help companies develop, disclose, and deliver “gold standard” Climate Transition Plans and is based around five elements:
- Foundations: This sets the groundwork for the transition plan, outlining the company’s overall approach to climate transition and how it aligns with its broader business strategy.
- Implementation strategy: This element focuses on the specific actions that the company will take to achieve its climate transition goals.
- Engagement strategy: This refers to how the company plans to engage policyholders, investors, employees, and regulators about climate transition plans and progress.
- Metrics and targets: This element involves setting clear, measurable targets for climate transition and tracking progress against these targets.
- Governance: This involves ensuring that there are appropriate governance structures in place to oversee the implementation of the climate transition plan.
Sector specific guidance for insurers has also been provided and is summarised below.
Guidance for Non-Life Underwriters
The global insurance industry represents a significant proportion of all asset owners, with a total global AUM of more than $40 trillion - significant capital controlled by insurers that, used in the right way, can accelerate the transition.
In practical terms, the TPT guidance for asset owners sets out numerous ways to consider their future actions across the five elements, including:
- Foundations – reducing financed emissions, investing in companies with credible transition plans, and using stewardship and other stakeholder engagement to monitor and encourage climate positive plans.
- Implementation strategy – setting out information on the short-, medium-, and long-term actions that are being taken including how it is adapting products and services (e.g. sustainability linked products/funds) and how it considers the transition plans of investee companies to align the investment portfolio to their climate transition.
- Engagement strategy – disclosing information on engagement activities with asset managers, investee companies, beneficiaries, financial service providers, and the industry (e.g. via industry initiatives).
- Metrics and targets – detailing governance, business and operational metrics and targets (e.g. portfolio alignment and engagement), financial metrics and targets (including investment in climate solutions), and GHG metrics and targets (e.g. financed emission).
The challenges for asset owners include collecting robust data on emissions (e.g. Scope 3 emissions), the ability to model the potential impacts of climate change on different asset classes to enable the right investment decisions, and what climate change can mean for underwriting considerations - in part because the impact of what climate change means for demographic assumptions (e.g. mortality, morbidity) is still evolving.
Guidance for Non-Life Underwriters
The TPT also provides guidance for insurance companies that underwrite in the non-life space. Similar to asset owners, the TPT sector guidance for insurers sets out practical considerations for insurers, including:
- Policies and conditions for priority sectors – e.g. insuring areas or sectors that are exposed to climate change;
- Claims management – e.g. working with claims management suppliers with credible transition plans;
- Changing products and services - e.g. underwriting low carbon technologies, services, and nature based solutions;
- Engaging with clients and customers – e.g. sharing climate-risk data with customers to help them understand their climate-risk and where opportunities exist.
Challenges in developing plans also exist for non-life insurers, not only from the uncertainty of how climate change may impact the underlying risk profiles of the lines of business insurers underwrite, but also in emissions data (for insurers emissions disclosures) and how quickly the demand for climate linked products and coverage is going to increase.
Climate Transition Plan Preparation and Alignment
The focus for insurers today should be on establishing an appropriate infrastructure or operating model around the five elements, and unifying these into a climate transition plan that is aligned to your business and financial ambitions. This will provide a robust baseline that can be adapted to incorporate developments in these areas as industry norms materialise.
Preparing to disclose a Climate Transition Plan will involve adjusting investment and underwriting practices; enhancing climate risk management capabilities, and potentially investing in new tools and technologies to accurately assess and monitor climate-related risks and opportunities.
Organisations will also need to adapt their strategic, financial and business planning, forecasting and monitoring processes to include climate impacts. This will enable insurers to demonstrate consistency between the climate transition plan, financial plans and business strategy in public messaging, and report progress to the market.
Strategic opportunities
Complying with the TPT requirements will be challenging, but can also yield strategic benefits for those who respond proactively:
- Enhancing brand: Insurers can position themselves as leaders in the fight against climate change, enhancing their reputation among policyholders, investors, and other stakeholders. Insurers that can get ahead on these topics, and can disclose accordingly, are likely to be seen favourably compared with peers.
- Business opportunities: By proactively managing climate-related risks, insurers can avoid potential financial losses and seize new business opportunities. For instance, they could develop innovative insurance products for renewable energy projects or electric vehicles.
- Investor attractiveness: TPT compliance can make insurers more attractive to investors. Many investors are increasingly prioritising environmental, social, and governance (ESG) factors in their investment decisions. Insurers that demonstrate strong climate leadership could therefore attract more capital.
- Regulatory efficiency: And finally, there is the regulatory requirement. TPT fits into a wider range of climate and sustainability frameworks, be that ISSB, CSRD, and others. Firms that invest in the appropriate sustainability framework can benefit from various areas of interoperability, driving out efficiencies in their sustainability operating model.
To conclude, the TPT represents both a challenge and an opportunity for the insurance industry and is rapidly approaching. By embracing the TPT, insurers can play a crucial role in the global climate transition, while also securing their own long-term sustainability.
If you have any queries on how to get started, please reach out, using the following contact details: Chirag Shah, Bridget Beals, Joshua Holbrook.
To explore this topic in more detail, register to attend Breakout session K: Insurance climate transition – Opportunity, Strategy & Climate Transition Plan hosted by KPMG at the ABI Annual Conference on 27 February. Book your place here. Bookings close at 12:00 on 26 February 2024.