Insurance industry: EU taxonomy law needs changes to fulfil green potential

4 July 2024 —

Insurance Europe and the European Insurance CFO Forum have reiterated their support for the EU’s Taxonomy Regulation which came into force in July 2020 and aims to create a common framework for classifying environmentally sustainable economic activities.

In its newly published position paper, the insurance industry recognizes that the law is fostering investment towards delivering climate neutrality. However, the insurance industry raises several concerns on the current reporting demands for underwriting and investment that is ‘taxonomy-eligible’ - specifically covered in the scope of the regulation.

In its paper, the insurance industry notes the following limitations:

  1. Limited coverage of investment portfolios: the taxonomy currently covers only a small portion of insurers' investment portfolios. This restricts the ability of insurers from providing a diversified portfolio that aligns with the taxonomy criteria.
  2. Focus on green activities over transition investments: the emphasis on existing green activities ignores company transition plans. Recognising and supporting these transition investments are crucial for achieving net-zero.
  3. The requirement to split premiums for climate-related risks: this results in very low KPI values, typically not exceeding 5% for primary insurers. This does not reflect the broader contribution of insurers to sustainability.
  4. Pooling of risk must be accounted for: insurers need to pool different risks together, such as climate risks with fire and theft risks for house insurance, for example.
  5. Reporting challenge: the draft guidance released in December 2023 by the European Commission came too late to be effectively integrated, leading to inconsistencies and confusion in the first mandatory reporting in 2024.