Following our most recent Risk Officer Sustainability Forum, here are some reflections on the implications of implementing Net Zero Transition Plans within the financial services sector. The workshop was hosted by Crowe UK. It featured a discussion focused on a case study led by members of the Just Group risk, investment and sustainability teams. I took away three observations and three questions as a result of Just Group’s case study on the workshop I was delighted to chair.
Observations and lessons learned from Just Group’s case study:
(1) Implementing transition plans is complex
It is okay to recognise that implementing a credible transition plan towards Net Zero is a complicated, multi-faceted task. It is however a strategically important and worthwhile activity, so it needs careful planning and significant stakeholder engagement both internally and externally to be successful.
This means that plans will evolve over time and will need to respond to new information, new technical and new standards. As we will see, it is important to approach this with authenticity and be open about the challenges.
(2) Being successful requires engagement
Most organisations now realised that emissions within their own controls (Greenhouse Gas scope 1 and 2 and business travel) are a small part of their total footprint. The funded emissions from assets, the insured emissions from underwriting and the supply chain emissions from vendors have the greatest impact.
In other words, in order to deliver a transition plan, an insurer needs to work with insurance clients who have credible transition plans themselves, asset managers need to do the same with organisations whose bonds or equities they hold.
Ideally it is about finding partners that have similar transition plan ambitions, where the insurance industry can support their transitions. In other cases, it may be through engagement that the sector can challenge others to move at a faster pace. In a few unfortunate cases, it may be that divestment or non-renewal is the last resort, but this should be on a case-by-case basis, and not a systemic response, because this might contribute to a more chaotic transition.
(3) Being transparent about your progress is critical
Transparency is very important because, at the end of the day, many organisations will need to work together to achieve the goal of an organised and just transition to a lower carbon economy. It is important to be open about the challenges associated with measuring carbon footprints and how information capture and quality will inevitably improve over time. In other words what we believe to be the situation today will, with the benefit of hindsight, be shown to be only a partial view. But this is fine, provided that the analysis is done with the right intent and the assumptions are made clear.
Questions organisations should ask themselves?
(1) Do you have the internal capabilities to make progress?
A key reflection from the roundtable was about the level of internal capability. In other words, do organisations have the right level of skills and experience across all their team? And might too much of the knowledge be held within corporate functions such as risk or sustainability. So how is the first line armed with the right experience to engage confidently with transition plans as a new subject within their core roles? The same challenges apply equally to asset management or investment functions looking at their portfolios, as they do to insurance underwriters reviewing insurance client submissions.
(2) Do you have the appropriate data analytics capability to leverage the information you need to gather?
Taking this a step further, how is information about transition plans provided to those who need it at an appropriate level of detail to inform decision making? Underwriters may not have the time or knowledge to dissect 100-page sustainability or transition plan reports. Is there a role for data analytics and artificial intelligence in providing focused insights to help underwriters filter down to the key decision factors for risk selection and pricing, or for investment professionals to evaluate their portfolio choices? Certainly, there are data providers who have been providing similar services for financial reporting and corporate governance related disclosures for a number of years. It is therefore likely that increasing demand will be responded to with new and innovative data services in the medium term.
(3) Will standardisation of sustainability reporting and regulation help or hinder?
The jury is still out on the impact of new standards such as the International Sustainability Standards Board (ISSB) reporting requirements or the UK government recommendations on Transition Plan Taskforce framework and whether these are game changers. Certainly, there is a desire from corporates to know what is expected of them in terms of reporting requirements and a realisation from insurers that without a greater level of standardisation, it will be very challenging in the short-term to adequately evaluate the relevance and veracity of these transition reports.
Alex Hindson is co-founder of the Risk Officer Sustainability Forum, which is hosted by the Risk Coalition. He was previously Chief Risk & Sustainability Officer at Argo Group and now is Partner and Head of Sustainability at Crowe UK and contactable at alex.hindson@crowe.co.uk
This blog summarise key points and reflections from the Risk Coalition’s Risk Officers Sustainability Forum (ROSF) roundtable discussion held on 6 June 2023. The topic for this ROSF discussion, held under the Chatham House Rule, was ‘Transition planning and associated risks’. You can find out more about ROSF here. To find out more about our discussion forums for Risk Committee Chairs and for Chief Risk Officers/Risk Directors, please contact us.