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The Partnership For Carbon Accounting Financials Standards and the Proposal for Insurance-Associated Emissions

After a process dating back to September 2021, financial services and insurance industry groups, coordinated by the Partnership for Carbon Accounting Financials Standards, that set out to create a standard to measure “insurance-associated greenhouse gas (GHG) emissions” recently published a proposed standard, but not all interested parties are satisfied. That leaves an unclear picture for insurers and reinsurers who need to figure out what data to collect and how to analyze it.

Partnership for Carbon Accounting Financials publishes Global GHG Accounting and Reporting Standard for Insurance-Associated Emissions

On November 16, the Partnership for Carbon Accounting Financials (PCAF), a financial services industry group that includes both financial and insurance firms, published its completed Global GHG Accounting and Reporting Standard for Insurance-Associated Emissions. PCAF and the United Nations Net-Zero Insurance Alliance (NZIA), an alliance of 29 leading global insurers, had launched a working group to develop a standard to measure insurance-associated emissions. The working group has 16 member firms, including Allianz, Liberty Mutual, Lloyd’s, Munich Re, Swiss Re, Tokio Marine and Zurich.

Insure Our Future, a campaign by NGOs and social activism groups to hold the insurance industry accountable for its part in the climate situation, followed the publication of the standard with a critique saying the standard does not go far enough, and that it runs counter to the UN’s stated goals.

The PCAF standard includes formulas to calculate an insurer’s share of responsibility for emissions, called the “attribution factor,” which is a ratio of insurance premiums divided by revenue, or in the case of auto insurance, premiums divided by total costs of vehicle ownership. Insure Our Future, in its response statement, wrote that this could mean that an insurer might only take responsibility for 1% of a company’s emissions, if the revenue is that much more than the premiums.

Insure Our Future also criticized the PCAF standard for not requiring mandatory disclosure of Scope 3 emissions, which are emissions from activities upstream and downstream of a company’s value chain. Scope 1 is direct GHG emissions. Scope 2 is indirect emissions from energy that a company buys.

Following the risk rather than following the money

PCAF had stated that the basis for insurance-associated emissions standards is “following the risk,” unlike the standards for finance industry emissions that “follow the money.” With financed emissions, the owner of the financial assets can have direct control over reducing those emissions, but with insurance-associated emissions, the insurance client only sees money flow in the form of claims, which aren’t the same as investments or loans. Those insured don’t have direct control over the source of the emissions.

PCAF has also identified challenges that insurers may have accounting for insurance-associated emissions and collecting and managing data about these measurements.

  • First, data availability. Insurers’ large corporate clients may generate equally large amounts of data on their emissions, that financial regulations now require them to measure and collect. Insurers’ smaller business clients may skew in the other direction – hardly collecting much information at all.
  • Second, reinsurers may have to go deeper than just reporting associated emissions. They may need to distinguish between different intensities of emissions.
  • Third, insurers and reinsurers have to make sure emissions aren’t being double counted if there are many different insurance companies bearing a large corporate risk, as often happens in insurance underwriting. The risk being covered is still the same, but the same emissions could get incorrectly counted multiple times for every insurer involved with a certain risk.

PCAF’s Global GHG Accounting and Reporting Standard for Insurance-Associated Emissions proposes ways to rate the quality of insurance-associated emissions data. It also states that there are three choices for emissions data: reported emissions, physical activity-based emissions, and economic activity-based emissions – and ways to calculate data quality for all three types.

Partnership For Carbon Accounting Financials Standards – next steps

A final version of the Partnership for Carbon Accoung Financials  standards was due to be published in December 2022 and will include the insurance-associated emissions standard along with standards for sovereign bonds emission removals and capital markets-facilitated emissions. The working group for the insurance-associated standards consulted with the public in July and August based on a March report on the scope for the standards.

As with many areas of ESG, the standards are still evolving and industry players must establish the capabilities to acquire and understand the related data, as well as retain the flexibility to apply that data for myriad analytics and reporting purposes as requirements evolve.

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