Climate Change
Climate change refers to the gradual increase in global mean temperatures over time, driven by rising concentrations of greenhouse gases in the atmosphere. This complex process is heavily influenced by human activity and future actions will play a significant role in shaping its trajectory.
For instance, under the most optimistic scenario, global temperatures are projected to rise by approximately 1.8°C by 2100, while in the worst-case scenario, temperatures could increase by 6–8°C. Some examples of physical risks associated with climate change are:
More severe, frequent, and prolonged droughts.
Increased intensity and frequency of floods and storms.
Significant rise in sea levels.
Loss and destruction of biodiversity.
The impacts of climate change extend far beyond physical risks. There is also technological, political, economic, demographic and others risks.
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Climate Risk Integration in ORSA
In April 2021, the European Commission introduced amendments to the Delegated Acts (EU 35/2015), requiring insurers to integrate sustainability risks into their risk assessment, management policies, and prudential framework.
The European Insurance and Occupational Pensions Authority (EIOPA) has placed particular emphasis on climate change within the broader context of sustainability. Consequently, insurers and reinsurers are now expected to include climate change analyses in their Own Risk and Solvency Assessment (ORSA) reports.
EIOPA’s overarching goal is to raise awareness among insurers about the risks posed by climate change in both the near and long-term future, particularly regarding insurance liabilities and overall solvency positions. For instance, both physical risks (e.g., extreme weather events) and transition risks (e.g., regulatory changes) may result in unexpected losses or adverse changes to liabilities due to inadequate pricing or neglecting climate-related risks.
Currently, EIOPA provides general recommendations for integrating climate change risks into ORSA, including:
Identifying the materiality of exposures to climate change risks.
Conducting stress tests and scenario analyses for each material exposure.
Considering both short- and long-term scenarios, with the latter spanning several decades.
Utilizing publicly available climate change scenarios to supplement company-specific analyses (e.g., NiGEM, 2°II, CARIMA, CLIMAFIN).
Generating projections for balance sheets and income statements under various scenarios.
TASC’s Approach to Climate Change Reporting in ORSA
TASC assists insurers in preparing climate change reports for ORSA, adhering to EIOPA’s recommendations while considering the specific demands and constraints of the insurer. This process includes:
Materiality assessments of climate risk exposures.
Conducting stress tests on identified material risks for both short-term and long-term horizons.
Selecting appropriate output metrics and reporting formats.
Documenting the process and results for inclusion in the ORSA report.
Given the flexibility of EIOPA’s guidelines, TASC adopts an adaptable approach to consulting on climate change risk integration in ORSA.
Climate Change Perspectives: ORSA vs. ESRS
Currently, the climate change section of the ORSA report is monitored by competent authorities, signaling that insurers should prepare for this requirement to become mandatory in the future.
Meanwhile, sustainability reporting is already compulsory for many insurers and other large companies in Europe. Starting in 2025 (covering fiscal year 2024), the European Commission has mandated sustainability reporting through Directive (EU) 2022/2464, commonly known as the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS).
The focus of the ESRS is on the company’s impact on climate change, emphasizing policies for reducing greenhouse gas emissions and energy consumption. In contrast, EIOPA’s ORSA requirements prioritize the impact of climate change risks on the company’s liabilities and solvency.
Despite these differing perspectives, there are areas of overlap where scenario-based analyses can support both ORSA climate risk reporting and ESRS sustainability disclosures, providing synergies for companies navigating these evolving regulatory frameworks.
