Sustainable finance in the insurance sector

European Union has promoted the idea of the environmentally-friendly and sustainable economy. Sustainable finance is consistent with the existing activities but also means significant changes for companies in the finance and insurance sector. What must insurance companies prepare for?

Sustainable finance in insurance — historical perspective

Though the sustainable finance is not an old idea, it has been developed intensely now. Its foundations are two memoranda from 2015 which gave the shape to the discussion. The first of them is the 2030 Agenda for Sustainable Development adopted by the leaders of the United Nations. The other is the Paris Agreement on climate change approved by close to 200 countries.

The above-mentioned international memoranda induced the EU organisations to start developing their own sustainable finance strategies. In 2016, the European Commission appointed the High Level Expert Group on Sustainable Finance (HLEG). Its objective was to develop recommendations being the basis for the financial sector strategy formulated by the European Commission.

Consequently, starting from 10 March 2021, some insurance companies will be subject to new obligations connected with the sustainable finance pursuant to the Sustainable Finance Disclosure Regulation of the European Parliament and of the (EU) Council 2019/2088 of 7 November 2019 (SFDR).

How should sustainable finance in insurance be understood?

Sustainable finance refers to the entire financial sector, including insurance companies. The sustainable finance is implemented to direct the capital stream to the investments which consider the sustainable development in their assumptions and which are neutral for climate changes.

What is sustainable finance in insurance like in practice? All investments should consider the ESG factors, i.e. the environmental, social and governance ones. Using the above criteria enables to determine if a given investment may contribute to the sustainable development. The so-called green investments are the ones which enable to reduce environment degradation (e.g. to reduce greenhouse gases’ emission).

Until recently, there were no standardised concepts, including the “sustainable” term. To change that, the experts started to create the taxonomy. Currently, there is a TEG report available which contains recommendations concerning technical criteria which should be used to assess the activity from the objectives’ perspective, i.e. the limitation of the adverse environmental impact.

Sustainable finance in the insurance sector — initial changes starting in March 2021

Insurance sector entities (besides banks and companies listed on EU stock exchanges) have been obliged to disclose non-financial information in their annual reports, i.e. to inform how they cope e.g. with the environmental challenges. This obligation stems from the Directive as regards disclosure of non-financial and diversity information by certain large undertakings and groups 2014/95/EU. However, their obligations in this respect are going to be extended soon.

The above Regulation 2019/2088 comes in force on 10 March 2021. It will impose new information requirements on insurance companies. They refer both to publishing additional information on websites and to providing it before a contract with a customer is executed. The insurers must post the following information on websites:

  • strategies concerning introduction any Sustainability Risks to the activity,
  • adverse sustainability impacts of the investment decisions,
  • method of ensuring consistency of the remuneration policy with the introduction of Sustainability Risks to the activity.

Later, as starting from 30 June 2021, also the financial market participants who exceed the average number of 500 employees in a financial year as at the balance sheet date shall post a statement on their websites whether their investments have no adverse impact on the environment and social affairs.

Every insurance company covered by the provisions of the above-mentioned Regulation will be obliged also to notify the customer before the agreement is executed of:

  • the method of introducing Sustainability Risks to the investment decisions made by it or insurance based investment advisory services,
  • the result of assessing the probable Sustainability Risks impact on the return on the offered insurance products or with respect to the ones it provides advisory services.

Insurance companies have more time to prepare to fulfil the new information obligations before a contract is signed. According to the Regulation 2019/2088 the deadline is 30 December 2022.

Sustainable finance in insurance — whom will the changes concern?

The above-mentioned obligations were not imposed on all insurance companies. The Regulation 2019/2088 refers solely to the insurers offering the Insurance Based Investment Products. The structure of those products or the target group of customers which those products are created for are not important.

The additional information obligations will be imposed also on the financial advisors (insurance agents) providing financial advisory services. An exception is the companies (and advisors) employing fewer than three people.

Although the regulations which are to come in force do not refer to insurance companies offering property and liability insurance, the specialists are certain this is not the end of changes. Sustainable development is one of the flagship concepts strongly developed by the EU institutions in recent years. For this reason it should be expected it will be considered in other regulations, e.g. the IDD and MiFID may be amended.

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