An evolving reporting environment for greenhouse gas emissions should spur the so-far limited adoption of a key standard for measuring emissions in insurers' underwriting portfolios.

The first version of an insurance-associated emissions standard was launched by the Partnership for Carbon Accounting Financials (PCAF), a standards-setter for measuring financial institutions' emissions, in November 2022. But so far, only a small number of insurers have published emissions estimates or targets using its methods.

This could soon change as insurers and their clients are pressed for more information on their emissions. For example, IFRS S2, a new accounting standard for climate-related disclosures — effective for reporting periods on or after Jan. 1, 2024 — contains a requirement that asset managers, commercial banks and insurers report financed emissions, suggesting a greater role for PCAF's insurance-associated emissions standard.

"Any insurer who wants to be ready for the IFRS or who wants to sign up to science-based targets will have to do this," Alex Hindson, partner and head of sustainability at accounting firm Crowe LLP, said in an interview "So it's really that that's going to pull this along."

Troubled beginnings

Having a standard to measure the greenhouse gas intensity of underwriting portfolios is important because, as insurers' own operations generate few emissions, the bulk of their greenhouse gas footprint will come from the emissions they effectively enable by insuring and investing in companies. Insurers and others have had a PCAF standard for measuring emissions in their investment portfolios since 2020.

As well as providing a consistent way to measure and track insurers' progress on their journey toward net-zero underwriting, an insurance-associated emissions measure will indicate an insurer's most greenhouse gas intensive business lines, and so where to focus their efforts.

However, the PCAF insurance-associated emissions standard has not had the easiest start. On the day it was released, climate activist group Insure Our Future said the new standard "opens the door for greenwashing." In particular, the activists criticized the lack of a mandate for insurers to disclose their clients' Scope 3 emissions and the use of premium as the numerator to calculate the insurer's share of an insured company's emissions for commercial lines.

The Net-Zero Insurance Alliance (NZIA), a driving force behind establishing the PCAF insurance-associated emissions standard, lost more than half its members in the first half of 2023 after a group of Republican lawmakers said the alliance may breach US antitrust laws. NZIA then dropped its requirement for remaining members to set and publish targets shortly before the July 31, 2023, deadline for the first interim targets. NZIA's target-setting protocol had mandated members use a "recognized and consistent" accounting approach for insurance-associated emissions, such as the PCAF standard or the CRO Forum carbon footprinting methodology for underwriting portfolios.

Without the NZIA requirement, "the impetus for publicly stating your decarbonization targets has significantly reduced," said Miqdaad Versi, partner and head of the ESG practice at consultancy Oxbow Partners.

While those who departed the NZIA vowed to continue their push for net-zero underwriting, and several are PCAF signatories, only a handful — including former NZIA members AXA SA and Allianz SE — have reported interim targets or emissions estimates. So far, European insurers are leading the way on net-zero commitments and target-setting.

But the shift toward more disclosures of emissions looks set to spur greater use of the standard. The UK government's Transition Plan Taskforce, a standard for private-sector companies' climate transition strategies, issued sector guidance in November 2023 calling for, among other things, disclosure of insurance-associated emissions. The guidance suggests the PCAF insurance-associated emissions methodology would be the "gold standard" for this disclosure, Crowe said in a Dec. 6 report. Crowe noted that although the guidance does not mention the PCAF standard by name, it requires disclosure on the business lines that match those covered by version one of the PCAF standard.

The final version of the European Union's Corporate Sustainability Reporting Directive omits the explicit reference to insurance-associated emissions that was in earlier versions, but there is a debate about whether it has been removed from the directive's spirit, according to Gregory Overton, director of risk modeling at PwC. The Science-Based Targets Initiative still refers to insurance-associated emissions, he noted. "Future regulation to encourage this and to make companies do it will be a further driver to make sure that everyone is at least doing the same thing and on the same page," Overton said in an interview.

The push for greater disclosure is also one of the drivers for Lloyd's of London's work with Moody's to develop a solution to quantify greenhouse gas emissions in the underwriting and investment portfolios of Lloyd's managing agents. The work uses the relevant PCAF standards as a starting point.

Growing impetus

Companies in other industries are also under greater pressure to disclose greenhouse gas emissions, which should make it easier for insurers to collect client data to inform their own insurance-associated emissions disclosures. There is a "significant push" across Europe and the US for greater carbon emissions disclosure generally, and it would be "bonkers" for insurers not to capture it, Versi said. "Within a few years' time, I'd be very surprised if regulators aren't expecting insurers to capture carbon emissions as part and parcel of their ongoing carbon accounting and the way they run their business," he said.

Pressure from business partners and clients could also spur more disclosure of insurance-associated emissions, and thus use of the PCAF standard. Hindson said he is seeing more questions from insurance buyers about their insurers' emissions.

The limited public disclosure of targets and emissions using the PCAF standard belies the amount of activity in the insurance industry overall. Data quality issues and other challenges mean companies are likely to be working on the standard in private before going public. "There's quite a lot of people that are trying to measure this," Overton said. "From an external market perspective, you may not see very much because not many people have disclosed. But there is a reasonable amount of work going on by a broader number of companies that are actually looking at it."

Insurance Australia Group Ltd. has developed an initial estimate of its underwriting portfolios' carbon intensity and is working on strengthening the data to inform decarbonization efforts and support interim target setting, a spokesperson said. Grupo Catalana Occidente SA is working on determining its emissions to allow it to set targets and is working on improving calculations and obtaining data. Swiss Re AG will provide an update on emissions targets when it publishes its sustainability report in March, and QBE Insurance Group Ltd. plans to provide updates on target-setting progress along with its 2023 earnings report Feb. 16. Zurich Insurance Group AG plans to publish its interim targets this year and is analyzing a range of methods, including the PCAF standard, to calculate insurance-associated emissions.

PCAF itself is committed to developing the insurance-associated emissions standard further and plugging some of the gaps in the first version. Adding more insurance products to the standard is one of the organization's development priorities for 2024, it announced Jan 16. The efforts of PCAF and its working group of large global insurers will be focused on adding treaty reinsurance and construction all risk/erection all risk, according to Marco Tormen, a managing consultant at Guidehouse who heads up PCAF's activities in Europe and German-speaking countries.

The current plan is to publish version two of the insurance-associated emissions standard, containing these additions and some further tweaks, in the first half of 2025, Tormen said in an interview. "At the moment, I'm still optimistic that we'll meet that timeline."