01/06/2018

Insurers Will Be Hard-Hit By Climate Change But They're Not Investing In The Low-Carbon Economy

Forbes - Mike Scott

  • The insurance sector is on the front line of the battle against climate change
  • All but three US insurance firms surveyed have no plans in place to decarbonise their portfolios or address climate-related financial risks
A  man walks through flood waters in Hoboken, New Jersey, after Hurricane Sandy. Flooding will become much more severe as climate change intensifies, increasing payouts by insurers. Photographer: Emile Wamsteker/Bloomberg

The insurance sector is on the front line of the battle against climate change – it is having to pay out more to policyholders as extreme weather events such as flooding, droughts, storms and heatwaves become more frequent and more severe.
At the same time, as some of the biggest investors in the world, insurance companies also face significant losses as climate change hits the companies they invest in. “Climate change poses risks for insurance companies, so do responses to it by markets, businesses, consumers and governments,” says Dave Jones, California’s Insurance Commissioner, in a new report by the Asset Owners Disclosure Project (AODP), which sees itself as the world’s benchmark of climate leadership in the investment system.
“The impacts of climate-related risks are a growing reality for the insurance sector. This reality has key implications for that sector's valuation,” the report adds. “Weather-related financial losses, regulatory and technological changes, liability risks, and health impacts related to climate change have implications for the business operations, underwriting, and financial reserving of insurance companies.”
Insurers know this – one of their key functions is to price risk so they know how much to charge in premiums to insure their customers. As a result, they devote significant resources to assessing various risks, and they have a better idea than most of the financial impacts of climate change.
And yet the sector is not aligning itself with the emissions reduction targets set out by the Paris Agreement, to limit average temperature rises to “well below 2°C”, according to AODP’s report, Got it Covered? Insurance in a Changing Climate.
The report examines 80 of the world’s largest insurers, with $15 trillion Assets Under Management, on their management of material climate risk.
“Less than 0.5% of assets invested by the world’s 80 largest insurers are in low-carbon investments that provide solutions to climate change, despite the insurance sector being highly exposed to its financial risks,” the report says, and nine out of ten investment strategies in the sector make the Paris Agreement goals currently unattainable.
In addition, progress is very uneven across different regions. “A handful of insurance firms in Europe are showing true leadership on climate change and are actively managing the financial risks it poses in capital markets,” the report says. The four top performers in AODP’s ranking – AXA, Aviva, Allianz and Legal & General – are all European, while all but three US insurance firms surveyed have no plans in place to decarbonise their portfolios or address climate-related financial risks.
Some companies are taking steps to improve their disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosure, with AAA-rated Legal & General moving up eight bands from last year. Japanese insurers have made significant progress in disclosing their climate risks and have overtaken US firms in their efforts to address climate risks in their portfolios. Tokio Marine, which was rated D in 2017, is now rated six bands higher at BBB.
This may be a knock-on impact of the move by the Government Pension Investment Fund, the world’s largest pension fund, to integrate environmental, social and governance factors into its investment strategy.
In contrast, all but three US insurers were rated D or X, the two worst ratings, including giants Prudential, AIG and New York Life, even though SEC disclosure rules have been in place since 2010, much earlier than in Europe.
AODP drew on both publicly available information and private survey responses. Only 24 of the 80 insurers surveyed responded, but this was up from just three last year, suggesting that the industry is starting to recognise the importance of climate risks. This perception is backed up by the fact that more than a third of the sector saw their ranking improve from last year.
Jones recently published the results of a stress test of the insurance sector that showed that many firms were heavy investors in coal, “with portfolios consistent with a trajectory of six degrees of global warming.
While European insurers’ higher rankings are consistent with the greater focus on climate disclosure in the region, campaigners say that they are not immune to risks. The average allocation of funds to low-carbon investments even in Europe is just 0.79% of total assets.
“Global campaigners, such as Unfriend Coal, point out that even top-rated insurers in AODP’s leader category do not always exercise their power as shareholders and underwriters but instead continue supporting high carbon businesses whose activities are inconsistent with the globally agreed two-degree goal,” the report says.
Pavel Kirjanas, report author, says: “This year, AODP has put the insurance industry in the spotlight. We applaud the leading and innovative approaches taken by the sector’s leaders. Unfortunately, there is no time to celebrate. While the world is being shaken by climate-induced catastrophes, the world’s largest insurers keep pressing the snooze button. US insurance companies seem complacent about portfolios that put us on a disastrous six-degrees pathway.”
The report recommends that regulators strengthen regulatory frameworks and mandatory requirements for climate-related disclosure and that investors prioritise engaging with the US insurance sector to promote better disclosure and management of climate-related risks and opportunities.

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