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Scope 3 emissions in underwriting: Insights to inform your starting point

by MARCEL le gouais

Data limitations and developing methodologies pose significant challenges for insurers attempting to calculate the scope 3 emissions within their underwriting portfolios (the indirect emissions lurking in the value chains of insureds). However, industry collaboration and standardisation can play a key role in resolving them.

This was the prevailing view expressed by experts on a panel session at the Sustainable Insurance Summit which explored the means by which insurers obtain data on insureds’ carbon emissions, along with the need for standardisation in the methodologies deployed to calculate underwriting-related emissions.

Hosted by Anthony Bice, Partner for Climate and Sustainability, Insurance and Asset Management at Oliver Wyman, the webinar featured practical insights from Fidelis MGU on its approach to scope 3 underwriting emissions, as well as work undertaken in this field between Moody’s Analytics and Lloyd’s.

“Many insurers are starting to refine and tighten up their Net Zero commitments, in part because they have started to work on these [initiatives] in practice and understand how difficult it is to measure and manage scope three emissions, particularly associated with underwriting,” Bice explained.

Capturing sufficiently robust data on insured emissions is a persistent issue, as many insured companies are only just starting to understand their own emissions footprints and those of their supply chains.

The panellists made a number of recommendations, including:  

  • The portfolio emissions figure should not be seen as an absolute number set in stone; it’s a starting point that may need to be refined and restated;
  • Scope 3 figures can be deployed as a tool to engage clients on their own transitions and trajectories;
  • It helps to maximise the amount of data emissions gathered directly from insureds where possible;
  • When obtaining and assessing data on insureds’ emissions, the data fields should be simplified to avoid an input overload;
  • Where insureds’ emissions are unavailable, or not stated publicly, firms will need to decide how to assess the robustness of other sources/estimates;
  • Using standardised methodologies will help the entire insurance market;
  • Insurers should compare the emissions data provided to them by insureds with public disclosures by that company to identify discrepancies.

Learnings from Fidelis

Fidelis issued its 2022 baseline disclosures on underwriting emissions last year and is finalising its 2023 update. The differences for Fidelis in calculating underwriting emissions on the second iteration for 2023 included tweaks in the methodology, different data inputs and a higher degree of automation, but also the awareness that some numbers might need to be restated as the company refines its approach.

One of Fidelis’s biggest challenges was assessing internal data and how it could be used most effectively to calculate emissions across underwriting.

Olivia Brindle, Head of Sustainability at Fidelis, said: “The starting point this year (on data) was a lot more advanced on that front, but people shouldn’t underestimate that part of the challenge. What is key is that, first of all, you treat it as a learning exercise to work out what needs improving and where the gaps are.”

The most commonly used tool to calculate underwriting emissions is the formula developed by the Partnership for Carbon Accounting Financials (PCAF) in 2022 – the Global GHG Accounting and Reporting Standard for Insurance-Associated Emissions.

The formula was designed to help commercial and motor insurers not just decarbonise their direct insurance portfolios, but also gain deeper insight into the risk profile of their books and create comparability in how insurers are progressing their underwriting transitions.

Marco Tormen, Europe and DACHLI lead at PCAF, explained that a working group is being established to expand the formula to treaty reinsurance ahead of a consultation this year and a launch in the first half of 2025.

In addition to disclosing against the PCAF standard, Fidelis also employs other metrics such as the intensity of emissions relative to both an insured’s activities and Fidelis’s own premium volumes. These metrics are important to understand what’s happening beneath the primary scope 3 numbers, and whether insureds are heading in the right direction, Brindle explained.

More data collection needed

A key issue that has been identified multiple times is the lack of carbon data, particularly for small and medium enterprises. The insurance value chain needs to add carbon to its data collection processes, Salman Siddiqui, Senior Director, Insurance Practice Lead for Europe and Africa at Moody’s Analytics, explained.

 “The data on carbon emissions is still not where it needs to be to get a better handle on insurance-related emissions,” Siddiqui explained, recommending insurers obtain as much emissions data directly from clients as they can.

He also highlighted the critical role brokers will play, and the need for carriers to engage with brokers on insureds’ concerns about giving up emissions information.

“Insurance data flow is controlled by the broker, ultimately. I believe brokers have a very big role to play in collecting more carbon data and more sustainability data at the point of submission,” he said

The data standardisation challenge

It was highlighted that as other financial institutions including banks also request emissions data from companies, the pressure is growing in the real economy to provide this information, which may also ultimately help insurers.

Bice raised the issue that the industry does not yet have a central utility or data provider for emissions information, adding: “We want to have a standardised reporting and calculation approach, but we don’t have standardised data requests yet, so each insurer and potentially each broker, has a different format for a different set of things that they’d like to get.”

Siddiqui added that carriers also have an opportunity to coalesce on the emissions and sustainability information they request from clients in submissions.

Ultimately, one of the webinar’s key themes was that insurers need to accept that in the initial years of measuring scope 3, methodologies are a work in progress and will continue to evolve – but obtaining as accurate a picture as is possible today and working together to standardise approaches will provide the base to build from.