Climate change remains a key issue and a top Boardroom priority for Insurers. Recently, the Bank of England (BoE) launched the climate biennial exploratory scenario (CBES) exercise and the Financial Conduct Authority (FCA) also proposed to broaden the scope of the task force on climate-related financial disclosures (TCFD) rules to apply to asset managers, life insurers and FCA regulated pension providers. Both are welcome developments and should help insurers, regulators and interested stakeholders better understand the potential impacts on and the resilience of their business models to the financial risks from climate change. 

In April 2019, the BoE made clear in Supervisory Statement SS 3/19 that a firm’s Board needs to understand, assess, address, and oversee the financial risks from climate change within its overall business model and strategy. SS 3/19 also mandated the clear allocation of Board (and sub-committee) level roles and responsibilities for managing this risk. Whilst both requirements appropriately address Board level ownership and responsibility, challenges often arise when attempts are made to integrate Board level strategies into the organisation and at levels below the Boardroom. Outlined below are helpful tips to address this issue:

1.        A Board level strategy for managing climate change risk is a necessary first step. Strategies must clearly articulate actions required and how they will be achieved, all within realistic timelines. It is important for the Board to bring the business along with it as strategy is developed and finalised. This can be achieved by either promptly communicating strategy to the business once formulated or better yet involving the business in formulating strategy. This would ensure that the business has early sight of strategy, understands its implications, and can begin to consider what may be required to successfully implement it.

2.        The Board level Executive responsible for managing climate change financial risks should have “green” credentials. This could be acquired either through recent and relevant experience or at a minimum recent and in-depth training. This would certainly enhance the credibility of any strategy developed and help secure buy in from the wider business. Recent experience and training are emphasised here to reflect both a need for knowledge of latest developments in this area but also the urgency with which businesses and society at large need to address this issue, given the ever-shrinking window of opportunity to take meaningful action.

3.        Strategies must be supported by appropriate frameworks and translated into detailed operational plans. Plans must clearly define roles and responsibilities for managing this risk below the Board level and across the three lines of defence. This is important because whilst the Board develops and owns strategy, the three lines of defence implement it through their functional area plans and as part of their respective roles in enterprise risk management (ERM) and Governance. For example, a firm might have a Board level strategy and allocated responsibility for managing climate change risks to an appropriate Executive. However, these are of little value if during the own risk and solvency assessment (ORSA) the risk management function has not considered climate change risks (and the resources required to do so in their operational plans) or the first line of defence is unaware of the Board level strategy and its responsibility for owning risk and implementing appropriate controls. 

4.        Whilst the Board is responsible for ensuring that appropriate resources are available to manage the financial risks from climate change, identification of resources required should come from within the business itself based on an analysis of strategy requirements, current organisational capacity and skill and other planned activities. Therefore, the successful execution of the Board level strategy can be achieved through its integration into the three lines of defence and respective functional area plans. There is also scope to introduce incentives to encourage the right behaviour to support strategy execution.

5.        The attitudes and beliefs of those in the organisation towards managing this and other risks - risk culture is a key consideration. An organisation with fit for purpose Governance structures and ERM capabilities but lacking an appropriate risk culture is much like a new and shiny super car with no fuel, it will never fully achieve its purpose. As a matter of course the prevailing risk culture in any organisation needs to be assessed regularly. This would help identify whether individuals across all three lines of defence recognise their risk management responsibilities and understand that the financial risks from climate change impact the business now and not at some unspecified future date.

Written by David Otudeko, Founder of Maison de Madaci