Localtapiola Life Insurance’s Chief Actuary Lauri Saraste reviews the new EU taxonomy and makes a case for a greener, more sustainable, and more resilient business.
The recent and relatively rapid development on how sustainability related matters will affect the European financial sector seems to be a game changer. One of the most influential single action might be the so-called EU work to set the taxonomy and the way it will be linked to the insurance legislations and obviously how European citizens and firms will start making decisions relating to sustainability. The 1st version of the taxonomy, which is scheduled for Summer 2019, will start listing climate change mitigation activities. This seems to be an important step in the process as the market might already start adapting towards this taxonomy even before the actual launch.
The taxonomy clearly is in the centre but the way it will be used is the question. EIOPA has already started the work on Solvency II and IDD but first, it is suggesting soft and principle-based ways to start with. Basically, it is trying to make both insurers and their customers aware of the issue in order make the process start. Some of the insurers in Europe have already done a lot and made clear statements on how their business needs to change on both investment and underwriting side, but in the large scope there is a lot to do still.
For insurers, including sustainability issues into their governance and business practice will help them better prepare and understand how the future development might affect their business. It also helps to review the risk appetite and make possible adjustments where needed. Another benefit will also be the way insurers can contribute on how societies can change to be more climate friendly, which also needs, in the first place, internal understanding from the insurer. After the principles, we will see if there will be something more tangible relating to brown and green investment classes and how to measure their risk percentage return profile. As there is yet no evidence, just ideas of the change of long-term risk profile, this is still a highly debated issue. One also needs to take into account the sequencing of actions when the market starts allocating assets using the new measures as the transition that the industry faces will bring new risks in the table.
It seems quite clear that societies have a lot to do to steer onto a more sustainable and less polluting path set by the Paris agreement or the IPCC 2018 report. As this change needs to happen in 10 to 15 years, it seems evident that institutional investors like insurers or pension funds are important pieces of the puzzle. Finding the way forward and agreeing on the steps needed is important in order to give the industry the possibility to start actions as rapidly as they see best.