Many leading U.S. insurance groups are significantly invested in oil & gas and other fossil fuel industries, even as these sectors face growing pressure from the global clean energy transition and physical impacts associated with climate change, according to a first-of-its-kind report announced today.
Authored by the nonprofit sustainability group Ceres in collaboration with investment consulting firm Mercer, the report analyzes fossil fuel holdings of the top 40 U.S. insurance groups, whose collective investments in coal, oil & gas and electric/gas utilities are worth $459 billion. The insurers’ investment data reflects information from insurers’ 2014 year-end statutory filings. Many of the insurance groups analyzed had significantly higher fossil fuel fixed-income investments than the benchmark Barclays U.S. Aggregate Bond Index.
“The global trend toward clean energy has significant implications for fossil fuel companies and their investors if action is not taken to manage climate risks,” said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk. “Our hope is the report recommendations provide a roadmap for insurers and regulators to better manage these risks and seize opportunities that come from this energy transformation.”
The report comes as fossil fuel holdings have shown to be increasingly risky. Sixty-nine North American oil & gas producers have filed for bankruptcy since the beginning of 2015. Also, a Ceres’ analysis found that over 70 percent of the top oil and gas companies invested in by the 10 largest insurance groups and rated by Moody’s or S&P have been subject to some sort of credit downgrade in 2015 and 2016. Even ExxonMobil lost its triple-A bond rating last month.
Key findings from, Assets or Liabilities? Fossil Fuel Investments of Leading U.S. Insurers, include:
Wide-ranging differences in oil/gas holdings are found among U.S. insurance groups. There are wide variations in concentrations of fossil fuel holdings among the 40 insurance groups Ceres analyzed. Insurance groups such as Ameriprise (12.4%), Lincoln National (11.8%) and Voya Financial (10.9%) had oil & gas bond holdings of well over 10 percent, more than double the median bond portfolio concentrations of the overall group (5.1%). Four groups had concentrations at 2 percent or less, the lowest being Progressive (0.2%)
The vast majority of the insurers’ oil & gas investments —81 percent of $221 billion—were held in bonds issued by companies used to finance extraction and other capital expenditures, as well working capital. Recently, at least one of the largest oil & gas companies—ExxonMobil—has been selling bonds to cover the cost of shareholder dividends.
Big differences found in electric/gas utilities holdings, as well. The report also saw a wide range in electric/gas utilities bond holdings, with the highest concentrations held by John Hancock (16.8%), Pacific Life (16.0%) and Lincoln National (14.4%). Lowest were Progressive (.5%) and QBE (0%). However, this report does not take into account the fuel mix of these utilities.
Coal investments are small, while clean energy holdings should be larger. Coal is a minuscule part of insurers’ overall holdings, accounting for only $1.8 billion, four times less than the $7.2 billion invested in renewable energy. Insurers’ renewable energy investments, while growing do not yet reflect the scale of clean energy investment opportunities required to avoid dangerous climate change. A Mercer study cites huge opportunities in clean energy, with average expected annual returns expected to increase from over six percent to as high as 10 percent.
The risks are especially pronounced in wake of the 2015 Paris climate deal; it has been estimated that a third of oil reserves, half of natural gas reserves and over 80 percent of coal reserves from 2010 to 2050 will need to remain unused in order to meet COP21’s goal of limiting global temperature rise to below two degrees Celsius.
“Our analysis suggests that a carbon emissions trajectory consistent with a 2 degree pathway – which the entire world supported in the Paris Agreement –would reduce the revenues of the upstream fossil-fuel industry globally by a cumulative $33 trillion by 2040 (in constant 2014 U.S. dollars) relative to the current trajectory the world is on,” said Mark Lewis, managing director of European Utilities Research at Barclays Investment Bank. “This number is simply too big for investors to ignore and should galvanize investor engagement with fossil fuel companies on the risk of stranded assets.”
The report provides several recommendations for insurers and regulators to manage these risks, calling on insurance board of directors to make climate risk management an integral part of their investment decision-making. It is recommended that boards consider requiring the insurers’ Investment Policy Statement (IPS) to explicitly include a climate risk management strategy, which should be reviewed on a regular basis.
“Using a bottom-up approach to determine the fossil fuel exposures of equity and bond portfolios is a key step insurance groups ought to consider taking to better understand the potential risk of their investments to climate change,” said Deb Clarke, global head of research at Mercer. “Coupled with top-down climate change modelling approaches such as described in Mercer’s Investing in a Time of Climate Change report would reveal even more about portfolio climate resilience.”
Insurance regulators, who are responsible for the financial soundness of insurers, should require insurers to disclose their investments. It is recommended that regulators adopt a universally recognized source for insurers to provide this information– for example, within their Supplemental Investment Risks Interrogatories.
California Insurance Commissioner Dave Jones called on all insurers operating in California to publicly disclose carbon-based investments annually in January of this year.
“As nations, states, and local governments across the world adopt more policies to restrict the burning of carbon in the face of climate change, there is a risk that investments in coal, oil and gas will become stranded assets of diminishing or no value. It is important for insurers to take action to identify and evaluate their potential investment exposure to climate change risks, both of which are necessary before implementing strategies to reduce climate risks,” said Commissioner Jones, who spoke at today’s news conference on the report. “That’s why I’ve called on all insurers to identify and publicly disclose their carbon-based investments annually and encourage other state insurance commissioners to take the same action.”
“U.S. insurance regulators have demonstrated leadership on the issue of climate change-related risks through new disclosure requirements and revised examination processes,” added Cynthia McHale, the report’s lead author and director of Ceres’ insurance program. “To ensure financial stability in a time of growing carbon asset risk, regulators should now consider a number of new actions to make carbon asset risk management part of insurer financial supervision and market oversight.”
To read a complete list of findings and recommendations, download the full report: http://www.ceres.org/resources/reports/assets-or-liabilities-fossil-fuel-investments-of-leading-u.s.-insurers/view
Ceres is a nonprofit organization mobilizing many of the world’s largest companies and investors to take stronger action on climate change, water scarcity and other sustainability challenges. Ceres directs the Investor Network on Climate Risk (INCR), a network of more than 120 institutional investors with collective assets totaling more than $14 trillion. Ceres also engages with 100-plus companies, many of them Fortune 500 firms, committed to sustainable business practices and the urgency for stronger climate and clean energy policies. For more information, visit http://www.ceres.org or follow on Twitter @CeresNews
The full and original article can be viewed on Ceres.org
Visit the Invest With Values - Resource Directory to access leading investor information, opportunities, organizations, events, groups and tools.