14 June 2022

Insurance Europe hopes for prioritisation in ESRS implementation

Olav Jones, deputy director general & director economics and finance at Insurance Europe, discusses CSRD and the European sustainability reporting standards from the standpoint of insurers as users and producers of sustainability information. Interview by Vincent Huck

Insurers will have to comply with CSRD, but also should benefit from the disclosures of other companies to make investment decisions, do you think the CSRD is a good news for institutional investors?

We've been very supportive of the Commission's drive on sustainability in general, but particularly the climate elements. One of the issues we had early on when the Commission first launched its sustainability agenda was that we felt it was really focused on the insurance industry and other financial services investors. From the beginning, we said we could play a really important role, but only if the whole of society moves. That means people changing their habits and companies both changing their habits and launching green type investments, in which we can then invest. But if these don't exist, we can't invest in a vacuum.

Olav JonesOther barriers to us playing our key role include a lack of data and barriers related to Solvency II.

Focusing on the data, we were willing to accept the Sustainable Finance Disclosures Regulation (SFDR) — our need to report — as it's part of the process where we will be judged by our actions. But we need data for that as well as for making sustainable decisions. So when the Corporate Sustainability Reporting Directive (CSRD) came along, we saw it as the key project, because it will require about 50,000 companies to produce a very wide set of sustainability data.

We're very supportive of the fact that it's going to be published in a machine-readable format, and we're therefore very supportive the European Single Access Point (ESAP) project, because the CSRD will make all this data available. But to make it usable in an efficient way, we need the ESAP project.

We do have some challenges along the way, because we have to start reporting under the SFDR in 2023 and unfortunately, the CSRD won't be producing the numbers that we need until between 2024 or 2025, depending on how the dates in the regulation are finalised. So that leaves us with a data gap during which we just have to manage. The Commission is very aware that, ideally, it would have done things differently. But given the urgency, we understand that you can't always get everything right. We are, therefore, looking for some recognition that there will be some challenges for the next couple of years in terms of the availability of data, the quality of data and also the availability of suitable assets in which to invest.

There are a number of pressure points in the trialogue, one is scope, in particular how to deal with non-EU companies and it has to do with subsidiary versus group reporting - Where do you stand on this?

Ideally, we would like all companies with which we interact or invest in to be covered.

The fact that European subsidiaries of non-EU companies are covered is good, and we hope that many more would do it voluntarily. In fact, it's very important that voluntary reporting is allowed. For example, in the ESAP project, the Commission has not yet thought of how it will bring in the voluntary non-European data into the process.

We want global standards, ultimately. Europe is not alone in recognising the importance of all this. Various other countries have their own processes. The IFRS Foundation, for example, is a key one. And without slowing down Europe, we really think it's important to find a way to arrive at a consistency so that in applying the European rules, we are complying with the International Sustainability Standards Board's (ISSB) standards.

And Europe can influence the international standards because, in some aspects, we are bit ahead of the curve which means we can influence the form that the international standards take. Ultimately aiming for convergence is something everyone wants, but it won't be easy to get.

I'm not sure that everyone wants that convergence...

I think everyone would like the outcome, but people have different views as to the degree to which one framework should dominate the other in the outcome and there are different views as to how much you'd give up in order to achieve that.

Going back to scope, we think that the reporting should be at group level because of the cost, but also because that is where the ESG strategy is set: from the top and then it should cascade through the organisation.

We support there being an SME version of sustainability standards. That should be very much aligned, but a lighter version. In addition, SMEs should have more time to comply.

For our own members, we also have a problem because the definition of SME doesn't really work for insurance or indeed the banks, because our balance sheets and turnover are just huge compared to a normal company. Therefore the measures used to define an SME under the legislation would pull in even very small insurers.

The banks have resolved this with a dedicated definition of SME for a bank under the banking rules, but we don't have that in the insurance sector yet. There is, however, one being discussed for Solvency II, so we are hoping that one way or another we will have a specific definition that works.

Some would argue that giving a lighter version to SMEs encourages a sort of tick the box /compliance approach rather than having the intended effect...

I disagree, have you looked at the proposed full set of standards? It's huge. To say that every company has to do all of that, and especially very small ones, will start creating a real problem for small companies.

Another pressure point is the assurance, and the question of who will do the audit, statutory auditor versus other – what is your take?

You should be able to use the same auditor to do your sustainability and financial assurance. If you tried to split those, you're going to increase the costs and complexity of those processes. And the separation between financial and non-financial is getting less and less clear.

We do like the fact that the Commission has tried to widen the pool of sustainability audit experts that can be available, but we believe that you should be allowed to use the same auditor.

You touched on convergence of the European and international standards earlier. It is increasingly said that EFRAG sought perfection where the IFRS Foundation has been practical. Would you rather see the ISSB standards being adopted in Europe than the EFRAG ones?

When it comes to the data that's needed for the SFDR, then it needs to be very precise because it needs to fit exactly with the very specific definitions included in the Regulation. Also, Europe has widely embraced the concept of double materiality, whereas the ISSB hasn't gone as far. So on both those accounts we support the European standards: however, that doesn't mean we support all the 190 proposed requirements.

On the other hand, I must say we really marvelled at how the European Financial Reporting Advisory Group managed to achieve so much in a very short time. And I don't think we resent the fact that its been so comprehensive, as long as it's recognised that its full set of proposals is not necessarily going to translate into what is actually taken forward by the Commission.

We almost certainly will be recommending some pullback from EFRAG's full proposals and crucially phasing in of these proposals.

We hope that the feedback we and others give in the consultation will result in a prioritisation process in regards to detail and scope.

We really think that prioritisation should be on climate, plus all the data we need in order to comply with the SFRD and the EU Taxonomy. It doesn't mean the other things are not important, because things like biodiversity are really important as well. It's just that, if you compare these to the urgency of the climate, it's probably slightly less urgent. But we're only talking about a few years difference, where one will follow the other.

And we need the prioritisation for two reasons.

One is we simply can't, as a community of stakeholders, design standards across such a wide range of issues in such a short time, because they won't be good enough. And then you've got the implementation: there's no way companies can implement all of the standards covering all of the scope at the same time.


Insurance Europe
Olav Jones