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PCAF for Climate Risk Reporting in the Insurance Industry

How insurance companies are hamstrung by the lack of industry specific scope 3 guidance, why help is on its way and what to do right now.

Pressures on financial institutions to align their activities to a net zero target are increasing. In November 2021 at the COP26 climate summit in Glasgow, United Nations (UN) Special Envoy on Climate Action and Finance Mark Carney announced that firms representing US$130 trillion in assets had joined the Glasgow Financial Alliance for Net Zero, a global coalition of leading financial institutions in the UN Race to Zero pledging to meet the goals of the Paris Agreement and reach net-zero in financed emissions by 2050.

The participants are organised in the respective United Nations Environment Programme Finance Initiative (UNEP-FI) convened alliances for banks, asset owners, and insurers, namely the Net-Zero Banking Alliance (NZBA), Net-Zero Asset Owner Alliance (NZAOA), and Net-Zero Insurance Alliance (NZIA) respectively. Australian signatories to the above include ANZ, CBA, Cbus Super, Macquarie Bank, NAB, and QBE.

Whilst the end goal in the race to net zero is clear, or at least clearer since the release of the Science-Based Target Initiative’s Net Zero Standard (SBTi Net Zero) and the requirement to deep decarbonisation of over 90% of full value chain emissions by the respective target year – the road is long and many financial institutions are stuck in the starting blocks: measuring emissions across value chains.

To understand how the regulatory environment is rapidly shifting, we explore how to calculate financed emissions under PCAF as an input into climate risk reporting for the insurance industry.

PCAF’s Guidance on Financed (and Insured) Emissions

Only as recently as November 2020, did the sector get additional guidance on the notorious GHG Protocol Scope 3 Standard category 15 ‘Investments’ by the industry-led Partnership for Carbon Accounting Financials (PCAF).

The PCAF standard provides detailed guidance for each asset class to calculate the financed emissions resulting from activities in the real economy that are financed through lending and investment portfolios. Until then, financial institutions either relied on their own interpretation of the GHG Protocol or omitted the calculations altogether. Therefore, public reporting of financed emissions pre 2020 was very rare, especially in Australia, with a few notable exceptions such as Future Super.

Since then, we have seen some cautious first (public) steps by the big 4 banks for example, but there is still a way to go to mass adoption. PCAF is a Euro- and US-centric initiative, which might partially explain why no major Australian bank, asset owner, or insurer has committed to PCAF to date. It’s fair to assume that companies have done more work behind the scenes which they hold close to their chests.

And by its own admission, PCAF still working on filling considerable gaps for certain asset classes (e.g., green and sovereign bonds), accounting modalities (e.g., how to treat emissions removals) as well as the climate impact of insurers and reinsurers. As announced in September 2021, PCAF is working on a new standard for “insured emissions” in cooperation with NZIA. Whilst the work only started in January 2022, and no real detail is in the public domain, there are a few steps insurance companies can already take to prepare.

How to Prepare for the PCAF Standard for Insured Emissions

Technically, insurance companies are covered under the PCAF standard and the SBT’s guidance for the finance sector, with the former allowing them to calculate the emissions from the lending and investment portion of their activities and the latter allowing them to set targets for such in line with the Paris Agreement. At present, the SBTi for example does not require financial institutions, including insurers, to measure and set targets on categories 1–14 scope 3 emissions as defined by GHG Protocol (albeit it is recommended). A scope 3 portfolio target for financed emissions suffices.

It’s safe to assume that PCAF’s working group will exclude and qualify where needed (e.g., life insurance, how will we go about attribution? etc.). It will also likely require additional quantifications in non-investment related parts of the insurers’ value chain. There are clues in NZIA’s commitment letter that for example clients’ Scope 1 and 2 and Scope 3 emissions, where significant, and where data allow, will be considered part of the attributable value chain emissions.

NZIA will also set underwriting criteria and guidelines to align activities within its underwriting portfolios with a 1.5-degree pathway, particularly the most GHG-intensive and GHG-emitting activities.

PCAF and Insured Emissions for Climate Risk Reporting – What Should Insurers do Today?

  • Calculate emissions of the lending and investment portion of your activities in line with PCAF for all asset classes that have existing methods (listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, and motor vehicle loans, and consider the new draft methods for public consultation for green and/or sovereign bonds and carbon removals).
  • Whilst you are at it, encourage your leadership to join PCAF. The only commitment is to report financed emissions within two years of signing the commitment letter, which is when disclosure is likely going to be a market expectation anyhow.
  • Start calculating client emissions for the parts of the business where this is workable, e.g., home and motor vehicle insurance, and potentially parts of your business insurance (noting that there might be data availability issues).
  • Start the discussion internally about 1.5-degree alignment and net zero commitment now and investigate requirements and pledges that might suit your company (the above UN convened alliances are a good starting point) and get an idea about timeframes. It takes time and a bit of practice to get the data for a 1.5 degree pathway or a science-based target, so get your ducks in a row for when the time comes, and your company is keen to commit.

As always, don’t let perfection be the enemy of the good. The entire financial sector is grappling with its role within the transition to a low carbon economy, so you are in good company. Just take the first step (or two).

Want to Learn More About PCAF or Net Zero Strategies?

Our experts are ready to discuss how we can support your financial institution become a leader in this space. Reach out to Michaela or the team on or call 03 7035 1740.

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