With nature disclosures on the horizon, the TNFD LEAP framework offers a step-by-step guide for insurers to get a grip on their nature risks, impacts and opportunities.
Locate, evaluate, assess and prepare – this is how (re)insurers and clients are being advised to tackle the emerging issue of nature in the new era of sustainability reporting.
This LEAP framework is central to the Taskforce on Nature-related Financial Disclosures (TNFD), which was finalised last year. TNFD – alongside the International Sustainability Standards Board (ISSB) and legislation including Europe’s Corporate Sustainability Reporting Directive (CSRD) – will set the standard for sustainability reporting going forward, with nature risks and impacts now a key component of disclosure requirements. Yet progress among (re)insurers on nature risk assessment has so far been slow.
Oliver Wyman has been conducting a TNFD pilot with a group of insurers, and the firm has learned that even the leading insurers in sustainability are still at the very beginning of their ‘LEAP’ journey. Many have not yet started at all.
“Something like 50% of global GDP is dependent on nature, but at the same time, we’re degrading nature faster than ever,” Rob Bailey, partner at Oliver Wyman, explained at Better Insurance Network’s Risks & Opportunities for Insurers event in November.
According to Bailey, understanding the wide-ranging economic threats nature degradation poses to businesses – as well as the implications of the wide-scale restoration of natural environments set out under the Kunming-Montreal Global Biodiversity Framework, adopted at COP15 in 2022 – is good risk management. The LEAP framework lays out an effective roadmap for this.
“By understanding how their clients interact with nature, insurers can better understand how the transition to a nature-positive economy is likely to affect them and how they need to support clients through new products, new solutions, and new risk management approaches,” he said.
Yet nature assessment poses a far more complex task than calculating greenhouse gas (GHG) emissions, which has been the central goal of most sustainability reporting frameworks to date.
“I think the biggest challenge that clients have been grappling with is the hyper-local nature of nature,” said Bailey. “To really understand nature-related risks and impacts, it’s not enough to understand what the company is and what sector it’s in and even where its head office is. You need to understand what its actual physical asset footprint looks like, what types of assets are located where, and how are they interacting and interfacing with nature.
“Ideally for a lot of sectors, you wouldn’t just have that view for owned assets, you’d have a view for their supply chains as well,” added Bailey. “Getting that view is quite challenging, but insurers have a bit of an advantage relative to banks sometimes on this because they’re often doing site-level property insurance, so they have data to begin with, on owned assets at least.”
A good starting point is to conduct a materiality study identifying key touchpoints with nature within the underwriting portfolio. This can be informed by geospatial maps for things like water scarcity, biodiversity pressure, and deforestation, for instance.
Once this data has been collated, it can be layered over the physical asset footprint and the geospatial nature-related data to build up a picture of where the most material risks and impacts exist. It’s also essential to engage stakeholders from across the business to build a sense of ownership and collaboration.
AXA XL has begun this process and created a heat map of its nature-related risks, impacts and dependencies. This data baseline will be used as a framework to help the company integrate nature and biodiversity into the business.
“We know that sustainability is at the heart of a more resilient future,” said Monica Henn, senior sustainability manager at AXA XL. “So we called that strategy ‘the roots of resilience’.” AXA’s outlook involves valuing nature, addressing climate change, and embedding sustainable practices across its operations.
Conducting a risk assessment is also likely to unearth opportunities for product development and strategic planning. “One insurer saw flood insurance in a particular region as a key product,” said Bailey, “so the process highlighted both the overall risk and the opportunity side.”
Financial disclosures are set to be in the spotlight as more insurers adopt the LEAP framework, and there is likely to be a big push to see more and more companies make ‘voluntary’ disclosures aligned with the LEAP recommendations. European insurers already have the CSRD, which will require the mandatory disclosure of impacts, risks and opportunities alongside a whole spectrum of sustainability issues. These issues will all need to be included in the disclosures and in audited financial statements.
And more legislation is incoming in a variety of jurisdictions. Many experts expect to see a nature biodiversity standard emerging in the near future, and in Europe some prudential regulators are already starting to think about incorporating nature into stress testing approaches. It is therefore never too early to begin the assessments that will be required to implement these new reporting standards.
Insurers must be prepared for this future, across every facet of their business. This means that they may need to educate or upskill their underwriters to understand these new data points. Internal and external collaboration is also essential, as well as engaging with clients and brokers to help them understand their risks and impacts and the broader implications of nature degradation.
“There’s a lot of engagement and education that we’ll hopefully be doing over the next year or two to better understand our clients’ needs and how we can support them,” said Henn. “We’re excited to see where this could take us and to see how we can use this information to embed nature into risk frameworks as an ultimate goal.”
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Explore the TNFD framework here.