The sustainability agenda remains a complex area for insurers. While we expect many of the 2023 themes to persist in 2024, the challenges around strategy, transition planning, and reporting will only continue to increase, and the bar of stakeholder expectations continue to rise. With the need for climate adaptation and resilience finally on the mainstream agenda, and the accelerated focus on tangible actions in the real economy, the insurance industry cannot afford to deprioritize sustainability, notwithstanding the near-term implications of geopolitical unrest. We also anticipate that the growing focus on nature topics will ensure that it breaks through to the mainstream of board and management discussions. As ever, prioritization remains a challenge. Here, we suggest 10 major sustainability issues that should be at the top of every insurance executive’s list in 2024.
1. The insurance industry plays a key role in the climate transition post-COP28
While the final outcomes of COP28 may not be what many in the sustainability community wanted, we did see some meaningful progress in areas. In particular, the commitment to triple renewable energy production and double the rate of improvement in energy efficiency by 2030, and the increased focus on transition finance, have direct implications for the insurance industry. However, the insurance industry was disappointingly underrepresented in the main discussions, with a sense that it is on the periphery of the finance sector mobilization. Yet, many of these commitments will fail without the active involvement of insurers to derisk the rapid changes, and currently we see neither the capacity nor appetite (risk and investment) to meet the expected increase in demand. These barriers will not resolve themselves without earlier and more active participation from the insurance industry in the planning, financing and the development of new energy production and the transition of existing “brown” production. This will bring to bear not just the core risk transfer and pooling function of insurance, but also ensures development is carried out in a risk-managed way and the cost of risk is fully incorporated into funding plans. As the transition unfolds, insurers need to apply these capabilities not only to energy, but increasingly to clean infrastructure in other hard to abate sectors, including heavy industries, transportation, and construction.
2. Climate transition plans 2.0
While many companies have now published their first climate transition plans, several “early adopters” are now in the process of preparing their second plan. It is clear that expectations have risen significantly. While version 1 was typically a “plan for a (transition) plan,” version 2 needs to show in far more detail the levers companies will pull, how these impact on their emissions pathways, and ideally set out further targets. Working against this is how best to address the legitimate concerns, especially for listed companies, around making forward-looking statements that may imply growth and profitability pathways. As a result, we are seeing as much focus on positioning the messaging as in the underlying analysis, as well as increasing use of boilerplate disclaimers and far greater involvement of legal teams and law firms. The danger of course is that we end up with a document so denuded of content as to be no value to any user group, an expensive exercise in saying as little as possible.
3. Refreshing targets and commitments
Many companies, most notably those signed up to the net zero alliances, set interim targets for 2025 that need to be delivered by the end of 2024. With that deadline now quickly approaching, and in some cases with the target having already being met, many companies are revisiting their commitments. Now, with the learnings of the previous target-setting process and experience with delivering against them, we anticipate greater clarity and specificity in the next round of targets. At the same time, insurers are increasingly questioning the value of net zero emissions targets as an end in themselves, particularly given the lack of direct control over much of an insurer’s scope 3 emissions. Rather, leading insurers are looking to position these targets as part of a suite of ambitions and aspirations that focus on tangible outcomes where they can have the most impact. Overall, we expect this to translate into targets that are potentially fewer in quantity but higher in quality, designed to drive real world outcomes and shifts in portfolio alignment. Leadership will increasingly be understood in terms of action and delivery, with a tighter narrative thread between commercial and ESG ambitions. One area where we expect to see more activity is targets for underwriting — the first of which appeared in 2023 — and an increased recognition of the impact from managing claims supply chains with a sustainability lens.
Insurers stand to benefit from increased customer satisfaction and loyalty. Our research has shown how people value companies’ support for their personal low-carbon ambitions
4. Supporting individuals’ emissions reductions
Because home, motor and travel lines cover the lion’s share of a typical household’s carbon footprint, personal lines insurers are uniquely positioned to help consumers reduce their emissions. In doing so, insurers stand to benefit from increased customer satisfaction and loyalty — our research has shown how people value companies’ support for their personal low-carbon ambitions more than corporate commitments for example. To do this profitably, insurers will need to work with other actors to build new ecosystems — for home retrofits, low-carbon mobility or sustainable repairs. We also anticipate the emergence of new industry standards, or even regulation, to level the playing field for green reinstatement.
5. Sustainability disclosure is becoming mandatory
The direction of travel is clear: audited climate and sustainability disclosures are becoming mandatory in a growing number of jurisdictions. At the forefront of this trend is the European Union’s Corporate Sustainability Reporting Directive (CSRD) for which the first disclosures are due in 2025. Consequently, CSRD readiness will continue to accelerate through 2024. Getting the initial double materiality assessment right is proving to be a critical first step, but, given the need for broad stakeholder engagement and extensive disclosure, can also be an effective launch pad for a wider discussion on how sustainability considerations should feed into strategy and risk management. We expect to see more insurers refresh their sustainability strategies in light of the results, as new ESG impacts, risks and opportunities come into focus. And because the double materiality assessment determines the scope of future disclosures, it has important long-run implications for reporting costs and risks. We will be watching to see how insurers begin to lay the groundwork for their first disclosures with descriptions of their CSRD work in their 2023 reports to be published in 2024.
6. Scaling climate adaptation and resilience
Climate adaptation and resilience presents a commercial opportunity for the insurance industry. Arguably, no other industry has such an important role to play in helping societies manage physical risks and build resilience to climate change, from how insurers underwrite and price for risk to how they fulfill claims and the influence they have on planning and construction. However, until now the topic has remained on the margins of most insurers’ sustainability strategies.
As part of a joint initiative between the United Nations Climate Change High-Level Champions, the United Nations Race to Resilience, the Adrienne Arsht-Rockefeller Foundation Resilience Center, and Marsh McLennan, Oliver Wyman launched a report, "Building A Climate-Resilient Future," at COP28 setting out five priorities for how the industry can fulfill its potential, creating a $71 billion annual revenue opportunity while contributing to the resilience of millions of people.
As climate impacts continue to mount and sustainability disclosure requirements push insurers to focus more clearly on climate-related risks and opportunities, we expect to see more insurers explicitly integrate adaptation and resilience into their sustainability strategies.
Climate adaptation and resilience presents a $71 billion annual revenue opportunity for the insurance industry
7. The COP28 pledge to make health systems more climate-resilient
While it has not been an area of significant focus to date, at COP28, 124 countries signed the first-ever Declaration on Climate and Health and $1 billion was pledged to make health systems more climate-resilient and better able to meet climate change’s mounting health consequences. The actions reflect a growing body of research — including a project Oliver Wyman is working on in collaboration with the World Economic Forum — indicating that climate change is becoming a health emergency. There is barely a disease category that will not be impacted in some way, whether it is increased prevalence of mosquito-borne diseases, prolonged periods of extreme heat exacerbating cardiovascular and respiratory illnesses, or water scarcity forcing people to use contaminated water, leading to more cases of cholera, dysentery, and typhoid. The health consequences will not just be felt physically. Research from the World Health Organization shows that the climate crisis is triggering a mental health crisis — with instances of stress, anxiety, and post-traumatic stress disorder on the rise. This issue also cuts across to naturerelated risks, including the degradation of the natural environment, for example through deforestation, which will have air quality impacts.
To date, life and health insurers have tended to view these impacts as “second order.” However, as the scale of the climate health crisis becomes clearer, we expect this to change as insurers begin to factor climate change into mortality and morbidity assumptions and even decisions about who and where can be insured, with clear implications for the insurance industry’s impact on the ’social issues’ aspect of ESG.
8. Integrating sustainability operating models and the role of chief sustainability officer
Insurers are continuing to address climate and sustainability via a broad range of operating models from stand-alone independent sustainability teams to fully integrated models, with a variety of structures in between. Ownership and reporting lines also vary, though we observe a recent trend towards alignment to the chief financial officer (CFO) as sustainability reporting (for example, CSRD and ISSB) considerations come to the fore. We also see chief underwriting officers taking broader roles to capture business arising from the energy transition and wider reorganizations to improve responsiveness to client needs, for example through the creation of energy transition verticals.
As the focus of insurers’ sustainability efforts shift from ambition to application, we expect the role of chief sustainability officers (CSOs) to become more challenging. It will be less about understanding the science (although that will remain important) and more about how to influence the way the insurer operates across the full range of strategic and operational disciplines. This may lead to the CSO becoming an executive committee role, but will certainly require the sponsorship and support of a senior figure in the organization, and a much more multi-disciplinary and federated supporting team. In all cases, cultivating productive relationships with CFOs, chief risk officers (CROs), Human Resource Development (HRDs) and corporate affairs directors as well as business heads will continue to be crucial.
9. Beyond climate — the increased focus on nature
In 2023, we saw the nature agenda continue to accelerate. With the publication of the Taskforce on Nature Related Financial Disclosures (TNFD) final recommendations and the inclusion of nature in the CSRD’s ESG framework, insurers are now busy assessing their nature-related impacts and risks across their investment and underwriting activities. Our work with clients on CSRD preparation has revealed that insurers frequently have material nature-related impacts that will need to be measured and managed — and then reported — going forward. In 2024, we expect to see leading insurers make their first TNFD-aligned disclosures and begin to pilot nature-related scenario analysis for their most material exposures. Work will also begin on integrating nature into the existing transitions plans.
The nature agenda continues to accelerate. In 2024, we expect leading insurers to make their first TNFD-aligned disclosures and pilot nature-related scenario analysis
10. The next generation of sustainable funds
Turning to the asset side of the balance sheet, we expect to see insurers direct more of their sustainable investments into thematic funds aligned to net-zero and, increasingly, nature-positive transitions. As we have argued elsewhere, these might include “carbon improver” strategies targeting firms in high-carbon sectors delivering sustained emissions reductions; funds investing in businesses that enable wider transition; and venture capital funds targeting breakthrough technologies. This targeted approach will allow insurers to pursue cross-balance sheet strategies, simultaneously de-risking and financing the transition, whilst developing the next generation of sustainable investment solutions for their clients.