Where there is risk, there is also opportunity. Getting the global insurance industry to act on climate risk is one of the tasks that has been undertaken by Mark Carney, the Governor of the Bank of England, as part of his role as Chairman of the Financial Stability Board (FSB). Last year the FSB launched a task force on climate-related disclosure 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. Mr. Carney warned a business audience in Toronto in his native Canada last Friday that only a third of the world’s biggest 1,000 companies are providing enough disclosure to investors about the potential impact of carbon pricing on their businesses. He also said there was a growing recognition that the liability of company directors in lawsuits involving climate disclosure might be a “lurking issue” for the insurance industry. Mark Carney, governor of the Bank of England (BOE), right, speaks with Catherine McKenna, minister... [+] of environment and climate change for Canada. (Cole Burston/Bloomberg) A study just out by the Asset Owners Disclosure Project (AODP) reveals the names of the insurers (among those who all together manage a third of the world’s investment capital with around $30 trillion in assets) who, by its analysis, are failing to take action to protect against climate risk. Europe is way ahead of the United States and other markets, it says, with nearly one in four insurers (23%) with 42% of regional insurance assets taking "tangible action" on climate risk. By contrast, only two U.S. insurers representing 16% of regional assets are taking such action and in Asia Pacific, just one. Insurance Asset Owner by Region Source: AODP London July 20, 2016 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. Its 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, says AODP. This is despite the fact that it notes "more insurers than pension funds recognize climate risk" as an issue that needs to be addressed. “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," said Julian Poulter, CEO of AODP. Just 1% of insurers consider the risks of stranded assets, compared with 6% of pension funds. 2016 AODP Global Climate Index Sector Performance Source: AODP, London July 20, 2016 “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 extraordinary that the left hand doesn’t seem to know what the right hand is doing," he added. By failing to protect their portfolios, insurers 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, according to Mr. Poulter. "When pension funds are starting to act there can be no excuse for insurers to lag behind," he said. A quarter of European insurers (25%) are taking no action, putting $730 billion at risk, or 10% of regional assets. These laggards include Germany’s Talanx and Belgium’s Ageas Group, according to the report. Only two U.S. 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," it says, include two U.S. giants: New York Life and Mass Mutual. As for 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%), says AODP. They include three Japanese giants with a combined $1.5 trillion: Japan Post Insurance, Nippon Life Insurance and Zenkyoren. The AODP Index also 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 U.K.’s Aviva, rated A. The next highest rated are France’s AXA, rated BBB, and Germany’s Allianz, which is rated B. 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 destabilize the whole financial system," says the report. Meanwhile, in terms of incentives... in Toronto last week, Mark Carney also pointed out the investment opportunity around climate risk. Speaking to Catherine McKenna, Canada's minister of Environment and Climate Change, he suggested that an enormous funding need for clean infrastructure could amount to between $5 trillion and $7 trillion a year.
Despite leading their US and Asia-Pacific counterparts in taking "tangible action on climate change," 25% of European insurers are still not protecting their portfolios, according to a study by Asset Owners Disclosure Project (AODP). One in four European insurers, with 42% of regional insurance assets, are protecting against climate risk, compared to two US firms and one Asia-Pacific business. The UK's Aviva; Germany's AXA; and France's Allianz, were named among as the insurers "doing the most" to protect their portfolios, however, the report also suggested insurers lagged behind pension funds, with only one in eight versus pension funds' one in four ranked "C" or above for successfully managing climate risk in their portfolios.