What climate disclosure means for insurers

Denver Fortuin | Chief Risk Officer | Absa Insurance | Absa Group | mail me |

South African regulators introduced a more structured approach to climate-related disclosure for insurers. Since then, expectations have tightened to mirror approaches in other markets. Regulators now treat these risks as having direct financial consequences for the sector.

The rationale for this shift is clear. However, translating it into practice will take time. It will also depend on closer industry collaboration as insurers build the capability required to meet these expectations.

Climate disclosure moves towards global alignment

In October last year, the Prudential Authority issued updated guidance on climate-related disclosures for insurers. The guidance grounded requirements more firmly in both international and domestic frameworks. It aimed to align with global standards while supporting more consistent reporting.

The Prudential Authority drew on developments such as the G20’s Task Force on Climate-related Financial Disclosures and the International Financial Reporting Standards’ sustainability standards. At the same time, it adapted the guidance to South Africa’s unique context.

The move recognises that climate change and the transition to a low-carbon and climate-resilient economy can affect the safety and soundness of financial institutions. It can also influence the stability of the financial system. This reality carries particular significance in South Africa.

South Africa faces exposure to climate-related disasters such as droughts, floods and wildfires. The country also confronts transition risks because of its reliance on fossil fuels for electricity, export revenues and employment.

Climate risks become financial risks

There is broad agreement that rising global temperatures will influence both the frequency and severity of weather-related events. In addition, a growing share of natural catastrophe losses is now linked to these changes.

For insurers, especially those exposed to property and casualty risks, this trend places greater emphasis on assessing, pricing and managing climate-related risks. As a result, climate disclosure has shifted from a sustainability exercise to a financial imperative.

At its core, the Prudential Authority expects insurers to treat climate disclosure as part of financial reporting. Insurers must demonstrate how boards and management govern climate risk. They must also explain how climate risk affects strategy, financial planning and the value chain across defined time horizons. Furthermore, they should show how scenario analysis informs decision-making.

The practical challenges of implementation

Climate risk must be integrated into existing risk management processes. Firms must quantify exposure and track progress through appropriate metrics and targets. Where relevant, these targets should link to remuneration. Organisations should also ground disclosures in local realities and support them through robust internal controls. However, widescale implementation is easier said than done.

The guidance assumes insurers can access granular and reliable climate data. Yet emissions data from clients and investee companies often remains incomplete. Local climate projections also remain limited.

Many insurers still rely on catastrophe models built around historical patterns. These models do not fully capture how risks may evolve over time. Consequently, uncertainty enters metrics and scenario analysis.

At the same time, the required skills remain scarce. Many organisations have not yet embedded the expertise needed to interpret this information effectively. Much of this work falls outside the traditional capabilities of many insurers, especially smaller or newer entrants.

Building these capabilities will require time and investment. Firms may develop expertise internally or seek external support. In addition, embedding climate disclosure into everyday operations will require internal change. Boards must engage differently, and organisations must restructure policies and systems to support these efforts.

Collaboration will determine progress

The adjustments carry costs. However, firms will differ in their ability to absorb them. Consequently, disclosures will likely reflect varying levels of maturity. This variation may affect consistency and comparability across the sector.

The constraints themselves are shared. Data gaps persist, and capability continues to develop across the industry. Therefore, progress will depend on how effectively stakeholders work together.

Insurers, regulators and other stakeholders must coordinate more closely. They need to improve the availability of usable data and create greater consistency in measuring and reporting climate risk. Moreover, they cannot defer this process.

The Prudential Authority has made its position clear. Insurers should begin now rather than wait for legislation to compel action.

Building the systems and internal capabilities required for credible climate disclosure takes time. Therefore, organisations will benefit more from steady implementation than rushed compliance under pressure. Past experience with similar guidance suggests that climate-related disclosures will likely become mandatory. The priority now is to ensure readiness before that moment arrives.