Impacts of the Spanish Climate Change and Energy Transition Act and EU Taxonomy on financial institutes and their insurers

The Climate Change and Energy Transition Act (the Act) came into force in May 2021. Assuming the objectives of the EU Green Deal and the Paris Agreement global framework, the new Act provides ambitious regulations to reduce greenhouse gas emissions, promoting transition to renewable energies and energy efficiency models to be implemented in a wide scope of sectors such as energy, transport and financial.

The Act reflects the EU’s direction of travel revealed at COP26 with the launch of the EU-Catalyst partnership between the EU Commission, the European Investment Bank and Bill Gates’ Breakthrough Energy Catalyst, which seeks to mobilise US$1 billion between 2022 and 2026 to speed up the development of innovative climate technologies. The announcement of the International Sustainability Standards Board (ISSB) which brings enhanced accountability through global sustainability reporting brings the global community one step closer to a successful transition to net zero and appears to further showcase and cement EU leadership in this race to zero.

European Commissioner for Financial Services Mairead McGuinness reacted positively to the progress made at COP26, emphasising that the EU seeks to use its leadership in sustainable finance and sustainability reporting aims to inspire global action in this space.

European Commissioner for Financial Services Mairead McGuinness reacted positively to the progress made at COP26, emphasising that the EU seeks to use its leadership in sustainable finance and sustainability reporting aims to inspire global action in this space.

In terms of the Spanish financial sector, the Act provides specific provisions for integrating climate change risks by promoting an adequate framework for sustainable investments and reorienting capital flows to achieve sustainable and inclusive growth. It includes regulations on climate risk disclosure and environmental data for financial institutions (including insurance and reinsurance companies). Issuance of an annual report becomes mandatory including assessment on the financial impact of climate change risks generated by the institution’s business model, transition risks to a sustainable model, and details of remedial measures taken for dealing with such risks.

Specific data to be disclosed by companies in this report will include:

  • Governance structure and roles, regarding identification, evaluation and management of risks and opportunities linked to climate change.
  • Strategic approach, both in terms of adaptation and mitigation, of companies in view of managing financial risks associated with climate change.
  • Current and potential impacts of climate risks and opportunities relevant to the companies' activities and strategy, as well as its financial planning.
  • Processes for identifying, evaluating, controlling and managing climate-related risks and how these are integrated into a company’s global business risk analysis and its integration into the company’s global risk management.
  • Metrics, scenarios and objectives for assessing and managing the relevant risks and opportunities related to climate change, scope of its carbon footprint, and measures for its reduction.

Regulations on the contents of a company’s annual report are expected to be approved in a two years’ time.

Further, the EU Commission has adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the Non-Financial Reporting Directive, and envisages the adoption of EU sustainability reporting standards, to be developed by the European Financial Reporting Advisory Group (EFRAG). The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives, and the first set of standards is set to be adopted in October 2022.

The above mentioned regulations on financial institutes are expected to have a wide impact on liability risk maps.

Comment

D&O coverages are expected to be exposed to a wide new scope of liabilities. Information regarding climate change risks and business models exposures will have to be carefully considered by directors and companies’ boards when making decisions or defining business strategies, as they may have a negative financial impact arising from future reputational damage, liability and/or litigation.

Companies will have to consider adapting business lines exposed to transition risks according to the new framework imposed by the Act. Energy, transport and construction companies are expected to be severely exposed to transition risks, that might require restructuring processes. Consequences of not doing so may imply devaluation of investments, and assets may face litigation, impacting on liability coverages. On the products liability side, a product whose manufacturing process has not been subject to a sustainable model could negatively impact on product liability coverage.

Due to these new risks, improvement of new models of risks assessments and an increase of premiums is probable. Traditional insurance products will need to adapt their coverages to new risks exposures, and new opportunities may arise for insurance products linked to this new risks scenario.

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