The Role of carbon accounting in Insurance

The Role of carbon accounting in Insurance

By Insurance 24

The insurance industry’s balance sheets hold a significant portion of countries’ economic assets and liabilities. This implies that, through key activities such as risk management, risk transfer, and investments, the insurance industry has the ability to support the transition to a resilient, net-zero future.

Zimbabwe has been intensifying its efforts against climate change and its effects. Recently, the government announced that it will closely regulate voluntary carbon offset trading in a bid to curb greenwashing and ensure benefits for local communities.

In Africa, many countries are keen to increase their presence in the voluntary carbon markets, and the Africa Carbon Markets Initiative (ACMI), which aims to support the growth of carbon credit production and the creation of employment, was set up.

The new partnership aims to harness Africa’s largely untapped potential to contribute to the supply of carbon credits while unlocking billions in revenue.

Countries such as Kenya, Malawi, Gabon, Nigeria, and Togo have already started collaborating with the ACMI to scale carbon credit production via voluntary carbon market activation plans.

The global $2 billion voluntary carbon offset market involves companies buying credits from emission-reducing projects such as renewable energy or planting trees to offset their own emissions.

Organizations operating carbon credit projects in the country are largely unregulated as they are only registered with local councils and traditional community leaders, but the government now wants all carbon projects to be registered with authorities within the next two months.

Zimbabwe is the world’s 12th largest creator of offsets, with 4,2 million credits from 30 registered projects last year. A single carbon credit represents a ton of carbon dioxide equivalent either removed from the atmosphere or prevented from entering it in the first place.

Those securities are bought by producers of climate-warming gases who want to offset their emissions.

However, on May 16, the government declared all previous carbon credit deals “null and void” as it looks to earn revenue from offsets.

 

Earlier in the year, the government indicated that the generation of carbon credits needed to be revamped to ensure that the government gets “a fair share of the proceeds from the trade”.

This is likely to have an immediate impact on the voluntary carbon markets, as some of the most profitable carbon projects are located in Zimbabwe and other neighboring African countries.

But how does this affect the insurance sector?

Insurance-Related Emissions

In line with the carbon accounting standards for financed emissions to account for the role of re/insurer’s underwriting activities, a global, standardized approach for measuring the greenhouse gas (GHG) emissions associated with insurance and reinsurance underwriting

Portfolios are needed.

Basically, carbon accounting standards cover lending and investment activities. Such a standard can enable insurers to consider the climate impact and transition path of their underwriting portfolios and inspire action through innovative decarbonization interventions, products, and policies.

All this while underpinning reporting consistency and promoting transparency. More importantly, the carbon footprint of insurance-related activities can inform underwriting decisions and catalyze decarbonization at the portfolio level through target setting, scenario analysis, and strategy development.

Sadly, this is a new phenomenon for the insurance industry in Zimbabwe.

“Follow The Risk” Principle

When it comes to financed emissions, the “follow the money” principle is applied, meaning that the money should be followed as far as possible to understand and account for the climate impact that financial assets have in the real economy.

From the perspective of underwriting, the nature of the relationship between the financial institution and the client is fundamentally different.

Underwriting basically seeks to lessen risks related to economic activity but does not finance this activity or suggest any form of ownership.

However, re/insurers do not hold a capital interest in the client operations, and no financial or direct operational control is exerted.

The absence of ownership or control over the client’s activity thus impacts the influence an insurer can have on the decisions made by the client in terms of decarbonization.

Therefore, in the case of insurance-associated emissions, the principle applied is “follow the risk” instead of “follow the money.”

A New Standard

The Partnership for Carbon Accounting Financials (PCAF) led the drafting of a scoping document that set out the guiding principles for developing a GHG accounting methodology for insurance and reinsurance underwriting.

The key objective of the scoping paper was to initiate wider engagement on insurance-related emissions and, through the feedback obtained, inform the consultation paper on the proposed approach.

The scoping paper was, therefore, broad in scope as it considered various potential approaches.

In 2022, the PCAF standard on insurance-related emissions was published and constituted the next step toward accounting for emissions related to underwriting activities.

What does this mean for reinsurers?

The absence of a global standard for insurance-related emissions meant that re/insurers were only able to measure, manage, and disclose emissions related to their operations (in line with the Greenhouse Gas Protocol (GHGP)) and investment activities (in line with PCAF’s financed emissions standard).

The publication of the new standard has therefore set in motion a number of changes conducive to achieving net zero across the insurance sector.

The disconnect between the mounting expectations around committing to net zero targets across operations, investments, and emissions associated with insurance and reinsurance underwriting portfolios is being bridged with this latest PCAF release.

The reinsurance industry in Zimbabwe thus needs to plan and agree on methodology to tackle the challenge holistically and develop credible and actionable decarbonization plans.

Creating transparency for stakeholders is another business goal that can be enabled by the insurance sector in Zimbabwe.

Externally, re/insurers can inform the market of their climate impacts through disclosures made in line with the Task Force on Climate-related Financial Disclosures, as well as a range of other

mandatory and voluntary methods.

Internally, informing stakeholders of their organization’s impact can increase trust among internal stakeholders as well as inspire new engagements and product offerings with clients and business partners.

Carbon accounting can further help reinsurers manage their own climate-related transition risks by building an understanding of the exposure embedded in their underwriting portfolios.

For example, identifying carbon-intensive underwriting activities in specific high-risk sectors can help identify areas that might be adversely impacted by the introduction of carbon taxation.

On the other hand, climate-related opportunities for innovation and sustainable product development across resource efficiency, energy sources, products and services, markets, and resilience are opportunities for reinsurers.

With a transition to a low-carbon economy, re/insurers can independently develop innovative products and services that enable their clients to decarbonize their business activities.

Through carbon accounting, re/insurers can see which sectors and businesses in their own portfolios require the most help in their decarbonization efforts and play an active role in their transition.