A conversation with ISSB – Are insurers ready for IFRS S1 and IFRS S2 implementation?

I think now is a good time to talk about the progress on climate-related disclosures for insurance companies because this report considers the progress made since October 2023, when the TCFD published its last annual report considering development and then disbanded. The Financial Stability Board, that set up the TFCD in the first place, has then asked IFRS foundation to take over the analysis on progress on climate-related disclosures. We published this report that analyses a sample of companies and the information they provided in their 2023 annual reports. When selecting the sample of companies, we considered different industries and, of course, the insurance industry is widely represented within the financial sector. The report analyses a sample of around 3800 companies, including 150 insurers, spanning life, health, multi-line and also some reinsurers. Similarly to previous reports prepared by the TCFD, we used Artificial Intelligence (AI) to analyse the information.

That is totally right. The report just published has analysed the use of the TFCD recommendations by companies. Most of them are in the process of transitioning from the disclosures prepared using the TCFD recommendations to the disclosures prepared using the ISSB standards. The ISSB Standards, IFRS S1 and IFRS S2, have incorporated the TCFD recommendations so there is no need for companies that use these standards to also use the TCFD recommendations. This incorporation is illustrated in a comparison document that the IFRS Foundation has published and is available to all on the website.

It is possible that some regulators might still require insurance companies to still use the TCFD recommendations during the transition phase but as you have highlighted, I think insurers are well positioned to complete this transition as the ISSB standards have built on the original TFCD recommendations.

The report has analysed the disclosures provided by different industries, including the insurance sector. The TCFD recommendations have 11 recommended disclosures. Not all companies, according to our sample, use the 11 recommended disclosures, on average there are five of the 11 that are used.

When looking at the insurance sector, the average number is higher, with more than five recommended disclosures present in the 2023 reports we have analysed. There are, of course, variations when looking at different regions as well.

Still, the overall key takeaway is that the insurance sector has a higher level of disclosures when using the TCFD recommendations.   

For insurance companies, the level of disclosures is very high in terms of Governance and Risk Management pillars, and their associated recommended disclosures respectively:

- Board oversight and management’s role for Governance pillar. 

- Description of climate-related risks and opportunities.

- Risk identification and assessment processes, risk management processes and integration into overall risk management for Risk Management pillar.

The report is very factual in its analysis of the percentage of disclosures by each company, so the reason is not discussed. Still, based on my knowledge of the industry, I think it’s related to the focus of some financial regulators on risk and risk management processes, also insurance business, by definition, is managing risk. So they are best placed to report on this topic.

I think you’ve identified exactly the two areas where the level of disclosures can offer room for improvement compared to the other more established areas. A mandated set of standards can help with that.

On the resilience of the company’s strategy under different scenarios is one area, where, in general, companies across industries have a lower level of disclosures compared to others, so insurers are not alone here.

Regarding the climate-related targets, it is true that the level of disclosure is slightly lower than areas like Governance or Strategy, but there are several resources that companies can use to improve and refer to during the transition from the use of the TCFD recommendations to the use of the ISSB Standards. 

Everybody is on a journey in this phase, practice will evolve, disclosures will improve, there will not be perfection on day one. There are areas that will require the use of estimates, and who better than insurers can make estimates. Some aspects will be refined as they learn how to do that, but if you are already using TCFD recommendations, you are in a good position to start your journey towards IFRS S1 and S2 reporting.