The Sustainability Reporting Journey—Can the US Learn from the UK Experience?
By Aisling Metcalfe and Lucy Saye
The Financial Reporter, November 2024
Sustainability reporting has been mainstream in Europe for several years now. The Institute and Faculty of Actuaries (IFoA), which is UK-based but has a significant overseas membership, has made sustainability an important area of focus for actuaries over the last few years, building on the core actuarial skill set of identifying, quantifying and managing risks. As Louise Pryor, IFoA president 2021-22 put it: “Climate related risk may be the defining risk of our times. Actuaries have an important role in assisting others to mitigate the worst effects of climate change. These include not only the long-term catastrophic risk to the world, but also the costs and risks to companies of transitioning to a low carbon environment which, even now, are impacting company results and are becoming subject to disclosure requirements.”
This article is intended to be a brief introduction to sustainability reporting for actuaries with no previous familiarity with it. We focus on UK insurance companies and give a short overview of the reporting journey that UK insurance companies have been on, with the hope of smoothing the journey for others. We will briefly describe the development and adoption of the framework for sustainability reporting, and discuss some of the practical points and challenges encountered.
A Brief History
The main framework currently used for sustainability reporting is the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).[1] Although in this article we are focusing on insurers, the TCFD disclosure recommendations apply to all companies.
The Financial Stability Board (FSB) created the TCFD in 2015 to improve and increase reporting of climate-related financial information. It was an industry-led, geographically diverse task force with 31 international members, including providers of capital, insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies. There were also more than 4,000 supporters from 101 jurisdictions. The remit of the TCFD was to develop voluntary recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing risks related to climate change.
In 2017, the TCFD released its climate-related financial disclosure recommendations. The 2017 publication included an annex on “Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures”; this annex was updated in October 2021.[2] The TCFD also released annual status reports between 2017 and 2023.
At the international climate change summit, COP26, in Glasgow, in November 2021, the International Financial Reporting Standards Board (IFRS) announced the formation of a new International Sustainability Standards Board (ISSB). The aim of the ISSB is to develop a comprehensive global baseline of sustainability standards. TCFD is part of the ISSB, and the TCFD was therefore disbanded in 2023, following the release of its 2023 Status Report. The UK government is currently considering how to endorse and implement the ISSB requirements aiming to make UK-endorsed ISSB standards available in Q1 2025, which will be known as UK Sustainability Reporting Standards.
The UK is aiming to be a leader in sustainability reporting and the government is making TCFD-aligned disclosure mandatory for over 1,300 of the largest UK-registered companies and financial institutions, making it the first G20 country to do so. The Financial Conduct Authority (FCA) introduced new rules and guidance in late 2021 for firms to make annual mandatory disclosures consistent with the TCFD recommendations. Disclosures are required at both the entity level and at a product/portfolio level. The stated aim was “to increase transparency on how firms are managing climate-related risks and opportunities and enable clients and consumers to make considered choices, while also remaining proportionate. This should, in turn, help to enhance competition in the interests of consumers, protect consumers from unsuitable products, and drive investment towards greener projects and activities.” The requirement applies to life insurers, asset managers and pension providers and the first public disclosures were required by June 2023, although many life insurers made TCFD disclosures several years ahead of the deadline. Once the UK-endorsed ISSB standards are available, the FCA will be able to introduce these requirements for UK-listed companies.
TCFD
The recommendations consist of four pillars that represent core elements of how companies operate: Governance, strategy, risk management, and metrics and targets. The four pillars are supported by 11 recommended disclosures that build out the framework with information to help investors and others understand how the organization thinks about and assesses climate-related risks and opportunities. These are summarized in Table 1.
Table 1
TFCD Recommended Disclosures
The three different scopes of greenhouse gas emissions are:
- Scope 1: Direct emissions from sources owned or controlled by the company.
- Scope 2: Indirect emissions from the electricity and other energy purchased by the company.
- Scope 3: All other emissions associated with a company’s activities, including those embedded in products and services. For insurers and asset managers, this includes emissions associated with investments.
Of the three emissions types, scope 3 emissions are by far the most difficult to quantify since that depends on information from third parties that may not be readily available or reliable. For insurers, the largest part of scope 3 emissions will be category 15 investments. This category includes both financed emissions and insurance associated emissions (emissions arising from an insurer’s underwriting activities) and these must be reported separately.
Typical Reporting
Insurers will incorporate sections on sustainability or non-financial reporting within the Annual Report and Accounts, including a statement of compliance with the TCFD recommendations. They generally also publish a separate annual Sustainability Report as part of the suite of annual external reports. Sustainability reports can be lengthy, running over 100 pages for large insurers and there may be a substantial amount of overlap between the sustainability sections of the Annual Report and Accounts, and the Sustainability Report.
The Sustainability Report is usually structured around the four TCFD pillars: Governance, strategy, risk management, and metrics and targets. As part of the metrics and targets disclosures, companies will generally provide information around their net-zero strategy and their emissions. Reporting of scope 3 emissions is proving particularly challenging for insurers, and the Sustainability Report usually includes information on the reliability of the scope 3 emissions data and how the company has used the available data. In some cases, there may be too much uncertainty for some scope 3 emissions metrics to be meaningful, and insurers may not calculate them; this is permitted by the regulation, provided the rationale for not reporting is given.
Many companies also include aspects of sustainability beyond climate change such as reporting on the social responsibility aspects of sustainability, and the report may reference the United Nations Sustainable Development Goals. Some aspects of the report are prescribed, since in the UK the report needs to comply with the TCFD recommendations (and companies usually include a section signposting how the report meets the TCFD requirements), but there is a substantial amount of variation in the quantity and type of additional information provided. A company will often use the report to highlight items that support its overall strategy and which it believes are of particular interest to its investors.
Under the social responsibility umbrella, companies may include employee matters and diversity, equity and inclusion, customer impacts, human rights—including compliance with applicable jurisdiction laws—and corporate citizenship. Companies may also use the Sustainability Report to highlight areas where they have made investments that will both provide good returns for investors and support wider sustainable economic growth and the transition to a green economy. This is a current topic in the UK where nine of the largest pension providers have signed the voluntary “Mansion House Compact.” The compact aims to encourage institutional investors to invest in unlisted equities with the aim of both increasing return on retirement savings and increasing investment in new companies in areas such as FinTech, life sciences, biotech, and clean technology, thus creating growth and jobs across the economy.
Companies may also include sections on other sustainability topics of interest; biodiversity is an area that is currently seeing interest with the Taskforce for Nature-related Financial Disclosure’s (TNFD) recommendations now available and mirroring the structure of TCFD reporting.
Practicalities and Challenges
One of the obvious questions is “who actually does the work of reporting all this?” A company may have a separate sustainability team, or several sustainability teams in different areas, e.g., within investments and the risk function. External reporting requires stringent processes and controls, and therefore responsibility for sustainability reporting will typically sit within or adjacent to the external financial reporting team so that sustainability reporting can leverage existing financial reporting controls. This is one of the reasons why sustainability reporting is of interest to financial reporting actuaries.
Sustainability reports will also have some assurance from the external auditor; auditing sustainability is an ongoing area of development. There is currently a focus on avoiding “greenwashing” (i.e., claiming something is more sustainable than it really is) and the FCA has introduced an anti-greenwashing rule with effect from May 2024, as part of the “Sustainability Disclosure Requirements and investment labels” regulation.[3]
As sustainability reporting has evolved there have been a lot of metrics developed, both those specified by TCFD and those specific to companies. As the reporting matures, some streamlining of metrics and reporting has been taking place.
Finally, sustainability reporting has been developing over the same time period as companies have been working toward implementation of IFRS 17. IFRS 17 implementation required substantial changes for many insurance companies and reporting teams have been challenged on several fronts at the same time.
Summary
The TCFD recommendations form the current basis for sustainability reporting in the UK. The TCFD has now disbanded and the ISSB has responsibility for sustainability reporting standards going forward. How these standards will be endorsed and implemented in the UK is currently under consideration with the publication of the first UK-endorsed standards expected in Q1 2025. Responsibility for sustainability reporting generally sits within or adjacent to external reporting teams, since external reporting teams already have controls in place to ensure the accuracy of reported information. Companies often report more information than the mandatory minimum, particularly where they feel this information will be valuable to their investors and customers. Sustainability reports for publicly listed insurers are accessible and a glance through the reports from some of the large UK and European insurers will show some of the informative reporting that is currently being produced.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Aisling Metcalfe is an actuary working in the UK insurance sector. She can be reached at Aisling_Metcalfe@yahoo.co.uk.
Lucy Saye is a sustainability actuary working in consulting in the UK. She can be reached at lucymsaye@gmail.com.
Endnotes
[1] Bloomberg, “Recommendations of the Task Force on Climate-related Financial Disclosures,” June 2017. FINAL-2017-TCFD-Report-11052018.pdf
[2] Bloomberg, “Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures,” June 2017. FINAL-TCFD-Annex-Amended-121517.pdf
[3] GOV.UK, "Sustainability Disclosure Requirements: Implementation Update 2024,” May 2024. Sustainability Disclosure Requirements: Implementation Update 2024 - GOV.UK