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Climate Change – Investment and Disclosure Considerations

Climate Change


Climate change is an ever more prevalent concern at the individual, societal but also corporate level. In an increasingly globalised world we are seeing collaborative efforts internationally where countries are coming together to tackle the threat, such as the goal of the Paris Agreement in keeping the global average temperature below 2.0 °C above pre-industrial levels, and to pursue efforts to limit the increase even further to 1.5°C.

But what does this mean for insurers? What should we as an industry be doing to help alleviate these concerns? What about the requirements on insurers to ensure that the industry contributes to the global effort?

In this article we explore two themes connected to these ideas, both of which are leading to the issue gaining a lot more attention within the insurance industry:

Climate change disclosures – PRA supervisory statement & TCFD

Bank of England Governor Mark Carney delivered a speech in 2015[1] where he explained that by the time climate change becomes a defining issue for financial stability, it will likely be too late to do anything about it. Following this speech, the Task Force on Climate-related Financial Disclosures (TCFD) was set up. Its brief was to create a set of consistent and comparable climate-related disclosure requirements for financial companies to produce, which “could promote more informed investment, credit [or lending], and insurance underwriting decisions”.

The TCFD released their final recommendations in June 2017, and by the close of 2018 the number of FTSE 100 supporting signatories had more than doubled to in excess of 20, including a few notable insurers[2]. In April 2019, the Prudential Regulation Authority (PRA) released a Supervisory Statement (SS) applicable to UK banks and insurers which sets out clear expectations on the strategic approach to be taken in relation to climate-related financial risks. Along with the expectations discussed in the SS, the PRA expects firms to engage with the TCFD framework (more detail of this below).

PRA Supervisory Statement[3]

There are four key expectations set out in the PRA’s Supervisory Statement:

  1. Governance:
    • Companies should fully embed consideration of climate-related financial risks into their governance framework.
    • Board-level engagement and accountability should be ensured and responsibilities should be designated to the relevant board members and sub-committees.
    • Adequate oversight of risks must be demonstrated with respect to a company’s strategy and risk appetite.
  2. Risk Management:
    • Firms must utilise existing risk management frameworks to ensure financial risks from climate change are adequately accounted for in line with their risk appetite, whilst recognising that the nature of climate change risks requires a strategic approach.
    • They must also provide evidence that these risks are being identified, measured, monitored and managed.
  3. Scenario Analysis:
    • Where appropriate, scenario analysis should be used to determine the potential impacts of climate change related risk on business strategy.
    • The scenarios should take into consideration the various pathways possible to transition into a low-carbon economy, and the impact these have on current business strategy.
    • Where appropriate, this should be considered in both the short and longer term.
  4. Disclosure:
    • Companies should develop and maintain an appropriate approach to the disclosure of climate-related financial risks.
    • This should consider not only existing categories of risk, but also the distinctive elements arising from climate change, as described in the supervisory statement:
      • Impacts are far-reaching in breadth and magnitude.
      • There are uncertain and have extended time horizons.
      • The risks have a foreseeable nature.
      • There is a dependency on short-term actions.
    • Companies should consider using the TCFD disclosure requirements framework.

The full PRA Supervisory Statement, available on the Bank of England website and referenced below, contains further detail.

What are the recommended disclosures from the TCFD?[4]

The TCFD developed a framework comprising four widely adoptable recommendations on climate-related financial disclosures, applicable across various sectors and industries.

Additionally there are specific recommended disclosures that all organisations should include in their financial releases, along with supplemental guidance for certain sectors (including the financial industry).

Below is a brief summary of the TCFD requirements, broken down in to the four business areas identified:

Risk Management
Metrics and Targets

This framework of disclosure requirements is applicable across all sectors, but it is important to note that for Insurance companies, there will be separate, additional requirements (under the same categories).

Embedding ESG into investment strategy

What is ESG investing?

It is clear that the investments we make have an impact on the world around us, and as a result it is ever more important that we try to ensure we are making ethical decisions when it comes to what we invest in. ESG stands for “Environmental, Social and Governance” (not to be confused with the other common use of the acronym, “Economic Scenario Generator”). It refers to a class of investing known as sustainable investing, whereby investments aim for both positive returns and a positive impact on wider society.

Why incorporate ESG into your investment strategy?

There is increasing evidence that companies that take ESG seriously are actually better companies. A firm that incorporates ESG into their investment strategy can serve as a window into how it conducts its business in a wider sense – if you care about your impact on the outside world then this will usually go hand in hand with caring more about the sustainability of your business model, how you treat your employees etc. This in turn should make companies a more attractive investment prospect for those who want to invest in them.

ESG factors also affect risk and return. All things being equal, it would be riskier to invest in companies that produce excessive greenhouse gas, have a poor health and safety record or don’t disclose important information on how directors are paid. Traditional financial wisdom usually suggests that with higher risk, comes higher reward in the form of investment returns.

However, recent studies and reports suggest that this may not be the case when it comes to ESG investing. It has also been suggested incorporation of ESG factors provides companies with lower volatility in their stock performance when compared with peers in the same industry. And studies have shown that risk-adjusted returns tend to be higher where ESG is at the heart of investment decision-making, for example, ESG portfolios were shown to outperform their benchmarks over four years to March 2018 for companies based in all developed countries bar Japan[6].

There is increasing evidence that insurers are seeking guidance from asset managers on how to incorporate ESG factors into their investment processes. A 2019 Cerulli report[7] on the European insurance industry showed there had been a significant shift towards Responsible Investing (RI).

How to incorporate into investment strategy

ESG factors can be incorporated into investment strategies in a number of ways. The first step will usually be some form of qualitative analysis which reviews whether the investment is beneficial for wider society with regards to ESG, then to assess whether this investment fits in with company strategy. Of course, insurers still need to bear in mind existing considerations when making other investment decisions, such as what is the impact on the asset liability matching position.

The next step may be to do some quantitative analysis, or financial forecasting. Where possible this would utilise existing models and ALM techniques to determine the impact of the investment and how it interacts with the existing portfolio. Examples of models (depending on the asset class) which may be utilised are discounted cashflow models and discounted dividend models for equity investments.

This analysis should ultimately inform the investment decision. If it suggests the investment is an appealing prospect then that may lead to a decision to buy or increase weighting in the asset, or sell or decrease if not. Firms may choose not to invest altogether if the results of the analysis are unfavourable.


It is clear that the impacts of climate risk are being taken more seriously and significantly affect the global economy, becoming an increasing influence on how we should all conduct business.

ESG investing and reporting is coming under more scrutiny and there is a clear direction of market movement towards increased disclosure. One of the significant difficulties for companies will be in assessing suitable future scenarios and analysing the quantitative impacts climate change may have on investments.  Within a finance context, the tension between maximising returns and ethical considerations is primary.  More widely, companies may find it difficult to assess suitable future scenarios and analyse the quantitative impacts climate change may have on investments. We feel that actuaries should be pushing to be at the forefront of these developments.

This article intends to give a brief introduction to new disclosures and the idea of ESG investing. For further detail please see the sources provided in the article, but there is a wealth of material existing online, and you may want to seek guidance from professional asset managers with regards to ESG investing.

Ben Slater

November 2019

Ben Slater





[5] As defined by the Greenhouse Gas Protocol –

[6] The following articles give further background to these ideas: