ESG continues to be a dynamic and evolving topic, always of interest to stakeholders of insurers. We explore some of the key developments in the past year and how they might apply to your firm.
The UK is expected to endorse the International Sustainability Standards Board (ISSB)’s IFRS S1 and IFRS S2, in the first quarter of 2025. The creation of these two UK sustainability reporting standards (UK SRS) will contribute to a wider sustainability disclosure reporting framework led by the Treasury. This important step will improve the quality and consistency of sustainability reporting across the globe.
Once endorsed, following consultation, the FCA will be able to use the UK SRSs to introduce reporting and disclosure requirements for UK-listed firms. The Government will also decide, most likely in Q2 2025, on requirements for firms that do not fall within the FCA’s regulatory net. But any changes would be effective no earlier than accounting periods beginning on or after 1 January 2026.
In the meantime, if you think your firm may be in scope, get familiar with IFRS S1 and S2. You may find some of our previous articles useful.
Transition plan disclosures and the FCA
The Transition Plan Taskforce (TPT) was formed in 2022 to establish the gold standard for transition plan disclosures. It published its voluntary disclosure framework in October 2023 and concluded its work in October 2024, with its materials and responsibilities transferred to the IFRS Foundation.
As part of the FCA’s consultation on implementing UK SRS, it will also consult on strengthening expectations for transition plan disclosures relating to the TPT disclosure framework. This paves the way for enhanced disclosure and reporting on transition plans.
European sustainability standards
In Europe, meanwhile, new sustainability reporting requirements have been introduced through the Corporate Sustainability Reporting Directive (CSRD). Firms subject to the CSRD will have to report according to EFRAG’s European Sustainability Reporting Standards (ESRS).
CSRD is being implemented in stages, with the first set of firms being asked to report in respect of the financial year commencing on or after 1 January 2024. CSRD is notable for a number of reasons:
- It impacts a larger number and scope of firms, including non-EU firms and groups that meet certain criteria. This includes non-EU firms with debt or equity listed on an EU regulated market that need to report in respect of the financial year commencing on or after 1 January 2024
- Increased scope of the reporting requirements in accordance with ESRSs which cover environmental, social and governance topics – with a high number of data points and disclosure requirements
- Introduction of the double materiality concept. This requires firms to consider the effects of sustainability matters on the firm, and also the effects of the firm on society and the environment
- Mandatory requirement for limited assurance over the disclosures, with a limited assurance report forming part of the firm’s annual report.
CSRD is complex and onerous, so impacted firms have a lot of work to prepare for and comply with the requirements. Over the coming years, CSRD will start to bite for more non-EU firms. So UK firms with subsidiaries, branches or significant activities in the EU should pay close attention. Please contact us if you need help assessing the impact of CSRD on your firm or require limited assurance over your CSRD reporting.
PRA developments
Since the publication of Supervisory Statement 3/19 in April 2019, the PRA has retained its focus on insurers’ management of the financial risks from climate change. This asks them to establish a strategic approach to climate-related financial risks by:
- Embedding consideration of such risks into governance arrangements
- Incorporating them into existing financial risk management practices
- Using scenario analysis to inform strategy setting and risk identification / assessment
- Developing an approach to making disclosures on the financial risks from climate change.
These requirements were reinforced in the PRA’s Insurance supervision: 2024 priorities letter in January 2024. Although the regulator recognised that insurers have taken positive steps to embed their expectations, they felt further progress was needed. This particularly applies to scenario analysis and risk management. It will also be updating SS3/19 to provide clarity, for example on effective practices and wider regulatory developments and thinking, and to build on the SS3/19 approach.
Given this continuing focus, insurers should revisit their progress against SS3/19 expectations and be prepared for the expected update to help shape and refine their approach.
Lloyd’s: insuring the transition
In July, Lloyd’s published its Insuring the transition roadmap v2.0 following a consultation at the end of 2023. It seeks to “build a marketplace which is resilient and responsive to the risks of today and innovating for the risks of tomorrow; a market that has the expertise and tools to support our clients as they transition, and a market which has the capital and strategy to grow and support more communities globally.”
The roadmap clarifies:
- Lloyd’s’ ambition to be the insurer of the transition
- How the Lloyd’s oversight framework for the market will consider transition over the coming years.
It covers underwriting, investments, capital and reserving and portfolio risk management and provides a tool for managing agents for their sustainability strategies in these areas. All Lloyd’s managing agents should review the roadmap, perform a gap analysis and develop their own action plan for addressing any omissions.
For more information about the matters raised in this article, please contact Jessica Wills.
