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Net-Zero Target Setting for Underwriters: the NZIA Protocol

By Michelle Radcliffe | March 17, 2023

With the July deadline fast approaching for NZIA members to set their first target, what does the Protocol mean for the future of tracking (re)insurers’ transition to net-zero?
Climate|Insurance Consulting and Technology

Two-months since the launch of the Net-Zero Insurance Alliance (NZIA) Target-Setting Protocol for underwriting portfolios in Davos, which Mark Carney referred to as a ‘historic milestone, a hugely important step on the industry’s journey towards net zero but also the world’s move to that same objective’, the focus for the 30 (re)insurer members, who represent c.15% of world premium globally, is now on setting their first target, to be set by July of this year. This target setting is against the backdrop of all NZIA members committing to transition their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas (GHG) emissions by 2050, consistent with a maximum temperature rise of 1.5°C above pre-industrial levels by 2100, in order to contribute to the implementation of the Paris Agreement on Climate Change. The Protocol aims to allow members to begin to independently set science-based, intermediate targets, providing a framework and measurement tool to then assess the impacts of their activities on climate change, and track the decarbonisation of their portfolios; members reporting publicly on their progress against the individual targets set. 

Membership of the NZIA is voluntary, and the Protocol seeks to set out best practice on setting and pursuing individual targets, such that members are still free to determine and implement their own decarbonisation strategies independently and unilaterally.  Nevertheless, the publication of the Protocol, and the steps which are now being taken to measure and track (re)insurers’ transition to net zero are noteworthy, and in keeping with the wider economy focus on ensuring that financial institutions and companies prepare robust and rigorous plans to achieve net zero, and support efforts to tackle greenwashing.

The Targets

The Protocol sets out five target types, split into three different categories:

  1. The Emissions reduction target category (Overarching emission reduction targets; Sector decarbonisation targets)
  2. The Engagement target category (Portfolio coverage targets; Focused engagement targets)
  3. Other targets (Reinsuring the transition targets)

Key points to note are as follows:

  • Members are (on a comply or explain basis) to set and disclose at least one of the five target types by 31 July 2023, and by 31 July 2024, set at least one target in respect of each of the three categories identified above.
  • Not all lines of business are currently in scope, the focus on commercial lines (with some exceptions, for example engineering lines and surety) and motor, members having the ability to decide which Lines of Business will be in scope for their 2023 targets.
  • A recognised and consistent Insurance-associated emissions (IAE) accounting approach (e.g. PCAF IAE Standard, CRO Forum Carbon Footprinting Methodology for Underwriting Portfolios) is needed when setting and tracking IAE targets.
  • When calculating a (re)insurers’ IAE, members are to cover a (re)insured’s Scope 1 and Scope 2 emissions, and, where significant and data allows, should also cover Scope 3 emissions in their IAE reduction targets.
  • Carbon offsets and Insurance-Associated avoided emissions will not count towards the progress of IAE reduction targets (the latter to be addressed in later versions of the Protocol).

The Challenges

Of the different target categories, setting out a target in respect of the emissions reduction target across underwriting portfolios is, at present, arguably the most challenging.  If using, for example, the PCAF IAE Standard, the formula for calculating IAEs varies by sector, Commercial Lines requiring data on emissions, and to calculate the “Attribution factor” (the share of the emission to be associated with the (re)insurer), (re)insurance premium and customer revenue. The limited emissions data quality across a (re)insurers’ portfolio will lead to not only discrepancies in the reliability of the end figure, but also arguably difficultly in comparing outputs year on year, given variations in premium and revenue levels. Limitations are, however, acknowledged, and the general sense is that data restrictions should not deter (re)insurers from starting to track their net-zero transition; having some benchmark to build on, even if subject to certain assumptions, is preferable to having a blank canvas. Further, the increasing requirement for mandatory disclosure of Scope 3 emissions in time, be that by investors or following disclosure standards such as those of the ISSB, will make the collation of Scope 3 emissions easier, such that establishing systems for capturing such data now is recommended, to ensure integration of such data into wider underwriting operating systems.

Engaging with clients is easier to facilitate, the aim being to increase the share of clients in a (re)insurer’s portfolio who have set their own science-based targets, or focus on the transition plans and decarbonisation strategies of clients.  Likewise, setting targets to grow (re)insurers’ business as pertains to climate solutions is likely something which already forms part of the objectives of many (re)insurers’ business plans, as they seek to use insurance to facilitate both climate change mitigation and climate change adaptation.

A Step Forward

Taking a step back from the challenges in formulating and then tracking such targets, whilst also seeking to ensure their reliability, one thing is clear, the Protocol is a big step forward for NZIA members, and arguably the insurance market, as such frameworks start to set the direction of travel for tracking (re)insurers’ transition to net-zero.

Concerns have been raised as to the extent to which (re)insurers’ can feasibly ‘police’ their clients transition to net zero, and what may happen in circumstances where to underwrite a risk associated with a high carbon emitting company may run contrary to a (re)insurers’ own transitional goals, such that insurance capacity for such risks becomes limited. The Protocol references the need for collaborative support with governments and industry actors, noting that if the global economy lags behind net-zero compatible pathways, NZIA members may not be able to achieve their stated objectives such that a ‘buffer’ may need to be tolerated in future iterations of the Protocol to reconcile members ambition to reach net zero with the need to continue to provide insurance capacity to activities essential to the global economy and society.

The requirement for a ‘just’ transition remains, not all regions, countries and communities transitioning at the same pace, such that it should not be surprising for different decarbonisation trajectories across different segments of portfolios. The expectation is that the next version of the Protocol will be published by 31 December 2024 at the latest, such that for members, considering the processes and data required to evolve systems to meet the current framework, is recommended.


Director, Climate and Sustainability, Insurance Consulting and Technology, WTW

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