The Net Zero Insurance Alliance (NZIA) Target Setting Protocol was launched on January 17, 2023 at the World Economic Forum’s Annual Meeting1. The publication follows a public consultation in November and reflects feedback received during the consultation process.
The Protocol sets out the expectations of NZIA members in setting targets related to decarbonization of their underwriting portfolios. Five “target types” are suggested, split into three categories:
- The emissions reduction target category refers to targets for the insurer’s Insurance Associated Emissions (IAEs).
- The engagement target category refers to targets for the level of engagement with the insurer’s customers on their own net zero transition.
- The other targets category refers to targets related to developing re/insurance solutions that cover activities contributing to climate change mitigation and adaptation.
In setting and tracking progress toward their targets, NZIA members are expected to use a recognized and consistent IAE accounting approach, such as the recently published Partnership for Carbon Accounting Financials (PCAF) IAE Accounting and Reporting Standard2.
The Protocol includes some important updates since the version for public consultation, in particular:
- It is strongly recommended that re/insured’s Scope 3 emissions are included in their emissions reduction targets (in addition to the mandatory inclusion of Scope 1 & Scope 2 emissions). Although this falls short of mandating inclusion of Scope 3 emissions, it is a more stringent requirement than the consultation version, where Scope 3 were included as optional only.
- For existing NZIA members, requirements to set targets are split into two stages: (1) By July 31, 2023, to set targets for at least one of the five target types; (2) By July 31, 2024, to set targets for at least one target type in each of the three target categories. The date of the second stage has been brought forward from that suggested in the consultation version (December 31, 2024) and demands more target types relative to the consultation version (which required setting targets for at least two target types, including at least one from the emissions reduction category).
The Protocol also clarifies expectations on requirements for new NZIA members. Any members joining before the end of 2023 are still expected to complete the second stage by July 31, 2024, while members joining from January 1, 2024 need to complete the requirements of this stage within 6 months of joining.
- NZIA members are expected to set portfolio target boundaries (i.e. the portions of their underwriting portfolio covered by the targets) for a “material and relevant portion of their respective portfolios where reliable data is available”. Since the consultation version, the Protocol adds a paragraph clarifying that “assessment of what is material and relevant should be guided by that portfolio’s reflection of real-economy emissions”, emphasizing that the materiality and relevance of a particular re/insured depends on their emissions and not just business value metrics (such as premiums).
There are many implementation challenges associated with these requirements, in particular the availability and reliability of data required to calculate re/insured’s Insurance Associated Emissions, and data to assess their transition ambitions and credibility. While the initial July 31, 2023 milestone does not require NZIA members to set targets for emissions reduction, there are several reasons for re/insurers to start developing the capability to measure Insurance Associated Emissions (including Scope 3 emissions) immediately:
- Existing NZIA members (and new members joining by December 31, 2023) only have until Jul 31, 2024 at the latest to set emissions reduction targets. Any new members joining beyond December 31 must set emissions reduction targets within 6 months of joining.
- IAEs can be used to assess and explain materiality in the setting of target boundaries. Indeed, IAEs are arguably the most natural measure of materiality as they reflect of the insurer’s share of real-economy emissions associated with individual contracts. Thus, it is important for re/insurers to have an understanding of IAEs for a large a portion of their portfolios, including contracts that they may ultimately choose to exclude from their target boundaries. In the absence of reported emissions, estimates can still provide useful information in understanding materiality.
- As a measure of materiality, IAEs (and associated PCAF Data Quality Scores) provide important metrics in helping re/insurers set engagement targets and understand where to focus engagement.
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