Climate-Savvy Investing: Insurance Sector Is Ignoring Risks & Rewards
Two years after Superstorm Sandy devastated large swaths of the East Coast and cost our economy an estimated $65 billion, the insurance industry – which is on the frontlines of climate change – is still not doing enough to address the risks associated with extreme weather events, such as floods, droughts or more intense coastal storms.
It’s no secret that property insurance companies often pick up the tab for losses that businesses and homeowners incur from climate-influenced extreme weather. What’s less recognized are the tremendous risks life and annuity insurers face in a warming world—and how few of them are proactively trying to mitigate their exposure.
For businesses whose foundation is risk management, it’s worrisome that most insurance companies in the U.S. are still dragging their feet when it comes to addressing climate change.
Life and annuity insurers handle two-thirds of the U.S. insurance sector’s vast investment holdings. They invest for the long-term, matching their investments to the time horizons of their policies. In the coming years and decades, as these investments play out, the effects of climate change will become ever more apparent.
Climate change is expected to impact virtually every sector of the economy, whether through supply chain disruptions, operational impacts or commodity price volatility. If insurers do not manage their investments with this reality in mind, they risk jeopardizing their returns and their long-term capacity to meet their liabilities. Life and annuity insurers also have extensive real estate holdings and mortgage-backed securities portfolios, many of which are increasingly vulnerable in a warming world.
The opportunity side of the equation is also critically important. There is money to be made in the fast-growing clean energy sector, and in adaptation plays such as investing in making infrastructure more resilient. The market for green bonds – a key financing mechanism for clean energy projects and other solutions for tackling climate change – is growing exponentially. More than $35 billion in green bonds have been issued so far this year, up from a total of $10 billion in 2013.
But for the vast majority of American life insurance companies, climate change – and the opportunities and risks associated with it – are simply not on the radar. That’s what we at Ceres found when we analyzed insurance company responses to a National Association of Insurance Commissioners survey on escalating climate risks. Our report is the first ever to benchmark the nation’s 330 largest insurance companies – about 87 percent of the total U.S. insurance market—on their responses to climate change.
In the life and annuity sector especially, these insurers’ own data show that they are woefully unprepared for a warming world. More than three quarters of the 92 life insurers we analyzed earned the lowest possible rating for climate risk management.
The only life insurance company earning a top rating was Prudential, which designates sustainability and environmental issues as board-level responsibilities, and has a high-level task force working on climate change. Other bright spots: Boston Mutual’s investment guidelines block it from over-investing in carbon-heavy industries. Lincoln National screens the company’s real estate investments for climate risks.
The insurance sector needs more clear-eyed companies like these, for its own sake and for the world’s. The International Energy Agency says investments in clean energy must quadruple to $1 trillion annually – what we at Ceres are calling the “Clean Trillion”— by 2030 if we are to limit global warming to two degrees Celsius (3.6 degrees Fahrenheit) by 2050. Reaching that temperature target would blunt the worst effects of climate change. It is a goal that cannot be reached without major investors—including the insurance industry— getting involved.
Climate change presents the kind of unpredictable, game-changing disruptions that can throw a monkey wrench into even the most careful actuarial calculations. For an insurance company whose core business is managing risk, it can even represent an existential threat.
But by choosing prudent investments that mitigate climate change and help society adapt to a warming world, an insurance company can make money while helping stabilize the climate and protect society. The result: a more profitable, more resilient business – and a more sustainable future for us all.