Behind 2014 and 2012, 2017 was the third-warmest year recorded since 1894. The trend of global warming has coincided with a torrent of weather-related disasters, and 2017 was no exception. Across the planet, droughts, floods, raging forest fires, and hurricanes displaced people, destroyed infrastructure, and disrupted the global economy.

From an economic perspective, this has cost the global economy upward of £217 billion. Add to this the £72 billion in insurance claims that the international insurance market reported, and you begin to get a sense of the scale of this. Insurers are particularly sensitive to climate-related events. In the UK, the recent results at Hiscox and Lloyd’s of London reflected this only too well, with Lloyd’s of London recording a weather-related pre-tax loss of £2 billion in 2017. This is the first loss the industry giant has experienced in six years.

Institutional investors have begun to wake up to this emerging economic reality. Of all institutional investors, insurers are particularly exposed to climate risks, with potential losses coming from portfolio damage (e.g. stranded assets) and insurance liabilities (e.g. payments due to climate events).  Mark Wilson, CEO of Aviva, recognised this when he said in April 2017 “if we do not take urgent action to limit global temperature increases to within 2°C, the impacts upon the economy, society and our business will be nothing short of devastating”.

In light of these material losses, the industry’s owners – its institutional shareholders – should be increasingly interested and aware of the climate-related risks affecting the insurance sector. To make asset allocation decisions, encourage best practice and differentiate between leaders and laggards, investors need to have a more comprehensive and consistent source of information on how the insurance sector is dealing with climate risks. Recognising this need, Michael Bloomberg and Mark Carney have laid the building blocks for what good disclosure looks like by creating the Task Force on Climate-related Financial Disclosures (TCFD).

The TCFD is an industry-led disclosure initiative that seeks to build a comprehensive framework for disclosing climate risk.  Over 100 business leaders, collectively representing more than £1.4 trillion in assets under management, have committed to implementing the TCFD recommendations.  The framework helps to identify how businesses – including insurers – have been responding to material climate-related risks.  The TCFD embeds climate-related risk analysis and reporting as a business imperative.

Broadly, the TCFD provides a four-tier framework (Governance, Strategy, Risk Management, Metrics and Targets) through which a company may report on how they are managing climate-related risks (physical, liability, transition).  At a time when shareholders are demanding transparency, and when there is a veritable throng of frameworks to pick from, the TCFD presents itself as a comprehensive and unifying solution that will “bring financial reporting to a mainstream audience”. Considering the potential sensitivity of the insurance sector to climate-related risks, investors should be pushing insurers hard to report along these lines.

The latest Asset Owners Disclosure Project (AODP) insurance survey has been aligned with the TCFD framework. The result being that AODP has created the first disclosure assessment framework that is tailored to a specific sector, and translates TCFD recommendations into a survey format. To bolster the breadth and depth of the survey, we drew on material from NAIC, PRI, and UNEP FI. By incorporating perspectives from different sources, AODP has created a tool that assesses and benchmarks climate action and leadership of the investment system in a fair and transparent way. The results of this assessment were used to generate an independent ranking of global insurers’ comparative performance based on their response to climate-related risks and opportunities.

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Without comprehensive information on how insurers address climate risks within their insurance policies, risk analyses and investment strategies, institutional shareholders who own shares of insurance companies may be unnecessarily exposing themselves to financial risk. As the weather-related losses of the insurance industry stack up, it becomes increasingly evident that climate-conscious insurance companies represent a financially sensible choice for investors. The AODP Global Climate Index reveals leaders and laggards, providing a snapshot of the industry as it stands and much-needed transparency information for investors and the insured alike.

 

By Sam Hayward, AODP Research Analyst, ShareAction