You would think that insurance companies would be experts in minimizing risk and reducing exposure to catastrophic natural disasters.
But a recent report suggests that the vast majority of insurance companies are not factoring in climate risk when it comes to their investment decisions.
Just one out of every eight insurance companies is taking tangible action on protecting their portfolios on climate risk, according to the Asset Owners Disclosure Project’s (AODP) annual Global Climate 500 Index, which analyzed 116 insurers with $15.3 trillion of investments.
The report also found that only 1 percent of those insurance companies assess the emerging risk of stranded assets, or the risk that carbon assets will become “stranded” in part due to future regulations on fossil fuels and growing demand for renewable energy.
Most of all, the report finds that insurance companies pale in comparison to how pension funds are evaluating climate risks such as climate change and drought.
Low-carbon investments represent on average only 0.8 percent of insurance portfolios, but 3.5 percent of pension portfolios as $30 billion of insurance assets are invested in low-carbon investments compared to $93 billion of pension assets.
Insurance companies generate revenue in two ways: collecting insurance premiums from customers and also investing those premiums in different investments.
The AODP says that while insurance companies are analyzing climate risk when offering insurance to their customers, the insurers are largely not assessing climate risk when it comes to their own investment portfolio.
“Pension funds in recent years have been driven by a small percentage of active members to review their management of climate risk,” said AODP CEO Julian Poulter. “This accountability does not exist for insurance companies who don’t have members, who are mainly listed and whose shareholders have been slow to hold them to account.”
The AODP ranks insurance companies on how well they are assessing these risks on with their own ranking system from AAA to D, and companies that have shown no signs of any action are referred to as laggards and are given the ranking of X.
Out of the 116 insurers analyzed by the AODP, 48 companies showed no evidence of doing anything to protect their portfolios from climate risk. This totaled $4.2 trillion assets under management.
By Keith Larsen
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