Culture eats sustainability for breakfast

Although the inclusion of climate risk in Own Risk and Solvency Assessment
(ORSA) and standard formula will induce insurance companies to be more aware of the effects of climate risk, the authors believe that without a change in culture it will be hard to embed climate risk into the DNA of insurance companies. Besides regulatory incentives like capital relief, a change in habits is required to not merely comply, but excel on the topic of sustainability.

Sustainability regulations without cultural acceptance are bound to fail

WHY NOW?

Climate risk has risen in importance over the past couple of years. Where in the global risk report of the World Economic Forum, none of the risk were climate related in 2012, in 2021 4 of the top 7 risks are climate related. Furthermore, each of the climate risks scores high on both the likelihood and impact scale, hence we are not only referring to high impact low frequency risks.

Also the financial sector has formalized the importance of climate change: in 2020 the Sustainable Finance Taxonomy was launched showing if an economic activity is environmentally sustainable. Companies will be required to report which percentage of a product can be considered as “green”. Although the taxonomy will make it more objective to determine which activities are sustainable, a concentration risk could occur where there is focus on a particular type of assets resulting in a lack of diversification. Furthermore as per 10 March 2021 the Sustainable Finance Disclosure Regulation (SFDR) has been enacted. This regulation prescribes disclosure requirements for financial product manufacturers and for financial advisors on substantial level. Furthermore central banks, like the Belgium national bank, have increased their attention to climate risk as can be seen from their annual reports.

Also the insurance sector has picked up on the importance of climate risk: EIOPA has written several consultation, discussion and opinion papers on how to include the effects of climate risk into the standard formula, ORSA, stress testing and pricing.

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