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Climate risk disclosure recommendations could help insurers, reinsurers

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Insurers and reinsurers will benefit from a voluntary global framework established for climate risk disclosure released on Wednesday. 

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures — at the request of the G20 nations — released a set of recommendations to guide companies in assessing the material risks climate change poses to their operations and develop plans to mitigate these risks. The recommendations cover four core elements: governance, strategy, risk management and metrics and targets. 

The recommendations are going to be particularly useful for the insurance industry, which is facing “a double whammy” because climate risks affect both their balance sheets, since they ultimately pay climate-related losses, and their investments in assets affected by climate risks, said Philippe Desfosses, CEO of pension fund ERAFP in Paris and vice chair of the Institutional Investor Group on Climate Change.

Reinsurers such as Swiss Re Ltd. have been focused on the issue for years, he said, but the recommendations will inform the industry’s decisions going forward, as it already has in places such as Florida where insurers often refuse to insure risks in the state.

Swiss Re, a member of the task force, said in a statement it would adopt the voluntary recommendations, including expanding its risk analysis to include aggregated expected losses from weather-related catastrophes, a description of physical risks from changing frequencies and intensities of weather-related perils, as well as the impact of a 2°C scenario on its business, strategy, and financial planning in its future annual financial reports. 

“There is no hiding the fact that climate change is real and its impacts are being felt across our economy,” Mindy Lubber, president of Boston-based investor coalition Ceres, said in a press conference call on Wednesday. 

On the governance front, the recommendations including describing the board’s oversight of climate-related risks and opportunities. Ms. Lubber praised the recommendations, which were developed by financial leaders making the business case, for making it clear that addressing and disclosing climate risk is a C-suite and board-level responsibility. 

Anne Simpson, investment director of sustainability at the California Public Employees Retirement System in Sacramento, California, and a member of the Investor Network on Climate Risk, praised the recommendations’ focus on strategy, which includes describing the potential impact of different scenarios, including a 2°C scenario — the goal of limiting the temperature increase to prevent the worst impacts of climate change — on the organization’s businesses, strategy, and financial planning, and its focus on risk management, including describing the organization’s processes for identifying and assessing climate-related risks. 

The recommendations are voluntary, but the investors said they would use them to pressure companies that have previously resisted disclosure because of complaints about the lack of a proper disclosure framework to disclose per the detailed recommendations. 

“The beauty of this report is that it solves that problem,” said Pete Grannis, deputy comptroller at the Office of New York State Comptroller in Albany, which oversees the state’s pension fund, and a member of the Investor Network on Climate Risk. “It sets a floor. It sets a standard.” 

The investors believe the recommendations will move their disclosure efforts forward despite the incoming change of administration in the United States, where it’s unclear who will be the next U.S. Securities and Exchange Commission chair and whether that person and the agency will continue to press companies on climate risk disclosure. 

In 2010, the SEC issued interpretive guidance to clarify what publicly traded companies need to disclose to investors in terms of climate-related material effects on business operations, whether from new emissions management policies, the physical impacts of changing weather or business opportunities associated with clean energy expansion. 

“Money talks,” Ms. Simpson said. “You can deny the science. You can’t deny the economics.” 

“Putting politics to the side … change will come about because this is our fiduciary duty,” she added.