Risk specialists ignore implications for their portfolios, putting trillions at risk.
The global insurance industry is failing to rise to the challenge of climate change, putting trillions of dollars of investments at risk and threatening financial stability, reveals a new study from the Asset Owners Disclosure Project.
Institutional investors are starting to take action to protect their portfolios from climate risk but AODP’s study of the world’s 500 biggest asset owners reveals that insurers are lagging way behind pension funds.
Insurers manage a third of the world’s investment capital with around $30 trillion in assets. In a speech to the industry  Mark Carney, Governor of the Bank of England and chairman of the international Financial Stability Board, warned they risk “potentially huge” losses from climate action that could leave vast reserves of fossil fuels as worthless stranded assets.
The FSB has now launched a task force to recommend how asset owners, the companies they invest in and financial intermediaries should report the potential impact of climate change on their bottom line.
AODP’s Global Climate 500 Index 2016: Insurance Sector Analysis finds that insurers perform worst and lag furthest behind pension funds on what should be their core competency, managing risks from high-carbon assets. They also lag on low carbon investment and engaging with companies they invest in to reduce climate risk.
- Just 1% of insurers are assessing the risk of stranded assets in their investments compared with 6% of pension funds, and 45% of global “leaders,” those asset owners doing most to protect their portfolios.
- Only 5% of insurers are measuring portfolio carbon emissions, compared with 13% of pension funds and 74% of leaders.
- Only 8% have staff dedicated to integrating climate risk into the investment process compared with 16% of pension funds and 97% of leaders.
- Only 3% have a policy setting out how they engage with investee companies on climate risk compared with 15% of pension funds.
- On average just 0.2% of insurers’ assets are invested in low-carbon, compared with 0.6% of pension assets.
Insurers invest predominantly in fixed income assets but the report warns they are relying too heavily on ratings agencies’ assessment of bond risks, without doing their own due diligence. Ratings agencies are only starting to re-assess this risk and the sub-prime mortgage crisis showed that if they get it wrong, this can destabilise the whole financial system.
Julian Poulter, CEO of AODP, said: “Climate change poses a double threat to the insurance industry. Insurers faces mounting costs from claims relating to the impacts of climate change, and the investment portfolios that enable them to meet those claims are exposed to climate risks as the transition to a low-carbon economy accelerates.
“Insurers are specialists in risk management, but while they may understand the implications of climate change in their underwriting they are failing to join the dots on the investment side. It is extra-ordinary that the left hand doesn’t seem to know what the right hand is doing. By failing to protect their portfolios they are threatening their long-term capacity to cover future claims, putting clients’ policies in jeopardy, and risking a systemic failure that could have catastrophic effects on the wider economy. When pension funds are starting to act there can be no excuse for insurers to lag behind.”
$4.2 trillion of insurance investments exposed to climate risk
AODP’s annual Global Climate 500 Index rates the world’s 500 largest asset owners on their success at managing climate risk in their portfolios, grading them from AAA to D, while “laggards” taking no action are rated X. The new Insurance Sector Analysis focuses on the 116 insurers with $15.3 trillion under management, comparing them with 324 pension funds with $15.9 trillion of investments.
Just one in eight insurers (12%) managing a quarter of Index insurance assets is taking tangible action to mitigate climate risk, graded C or above. By contrast nearly one in four (23%) pension funds accounting for a third of pension assets are graded C+.
The Index identifies a group of 31 global leaders, asset owners rated A to AAA, who are doing most to protect their portfolios from climate risk. It includes 26 pension funds but just one insurer, the UK’s Aviva, rated A. The next highest rated are France’s AXA, rated BBB, and Germany’s Allianz, rated B.
However, more insurers than pension funds recognise climate risk as an issue: 59% are rated D or above compared with just 51% of pension funds. Nevertheless, the X rated group of laggards taking no action includes 41% of insurers exposing $4.2 trillion of investments to climate risk and 49% of pension funds with $5.5 trillion.
Europe way ahead of US and other markets
The Index also reveals big differences between regional markets. Europeans not only make up 11 of the 14 C+ rated insurers taking tangible action on climate risk, they also outperform insurers in the Americas and Asia Pacific on all three approaches to managing the issue, risk management, engagement and low-carbon investment.
Europe – Nearly one in four insurers (23%) with 42% of regional insurance assets is taking tangible action. A quarter of insurers (25%) are taking no action, putting $730 billion at risk, 10% of regional assets. These laggards include Germany’s Talanx and Belgium’s Ageas Group.
Americas – Only two US insurers representing 16% of regional assets are taking tangible action: Hartford Financial Services Group, rated CC, and Prudential Insurance, rated C. Three in five insurers (60%) are taking no action, putting $954 billion at risk, nearly a third (32%) of regional assets. Laggards include two US giants, New York Life and Mass Mutual.
Asia Pacific – The People’s Insurance Company of China, rated CCC, is the only Asian insurer taking tangible action. Twelve laggards are taking no action, putting $2.5 trillion at risk, more than half of regional assets (52%). They include three Japanese giants with a combined $1.5 trillion: Japan Post Insurance, Nippon Life Insurance and Zenkyoren.
Financing the transition to a low-carbon economy
In his Tragedy of the Horizon speech, Mark Carney highlighted the opportunities of low-carbon investment and said “green” finance cannot remain a niche interest if the world is to limit climate change to two degrees.
He said: “Financing the decarbonisation of our economy is a major opportunity for insurers as long-term investors. It implies a sweeping reallocation of resources and a technological revolution, with investment in long-term infrastructure assets at roughly quadruple the present rate.”
However, the report reveals that of the $15.3 trillion insurance assets on the Index, just $30 billion is invested in low-carbon, 0.2% of assets. Even among asset owners disclosing low-carbon investments, insurers invest on average just 0.8% of their portfolios compared to 3.5% of pension portfolios.
Julian Poulter said: “The Paris Climate Summit signaled the end of the fossil fuel age by pledging to limit warming to a maximum two degrees. The insurance industry now needs to wake up to the real risks of climate change, take urgent action to protect its trillions of dollars of investments, and in so doing help finance a smooth transition to a low-carbon economy.”
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NOTES TO EDITORS
The Asset Owners Disclosure Project is an independent not-for-profit global organisation whose objective is to protect retirement savings and other long term investments from the risks posed by climate change by improving disclosure and industry best practice. www.aodproject.net
 Insurance industry to double its climate-smart investment by end of 2015, ICMIF, 24-9-14
 Breaking the Tragedy of the Horizon – climate change and financial stability, 29-9-16