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Insurers warned over climate change risk to investments

Insurers are lagging behind other institutional investors in protecting their portfolios against climate risk, according to climate change investment transparency body the Asset Owners Disclosure Project (AODP).

Just one in eight insurers is taking tangible action, compared with one in four pension funds, the group said.

The AODP assessed 116 insurers with $15.3tn of investments and compared their performance to 324 pension funds with $15.9trn of investments. The two groups account for over 80 percent of the $38tn of assets covered by the index.

Across all the asset owners, 31 were considered leaders in managing climate risk, only one of which was an insurer.

The report also found that while insurers consider climate risk on their liabilities, the vast majority overlooked the impact of the low-carbon transition on their investment portfolio.

The findings are significant because generally insurers' asset allocation is far more concentrated into fixed income than pension funds.

This leaves them exposed to the climate capacity of ratings agencies, which are only starting to reassess this risk. Insurers' lack of asset class diversification also means that company engagement is restricted to a minimum, although their direct company risk is retained through corporate bond risk.

Earlier this year Mark Carney, governor of the Bank of England and chairman of the international Financial Stability Board, warned in his "Tragedy of the Horizon" speech to the insurance industry that investors risk "potentially huge" losses from climate action that could leave vast reserves of fossil fuels as worthless stranded assets.

However, just 1 percent of insurers are assessing the risk of climate change-related stranded assets compared with 6 percent of pension funds, according to the AODP report.

The research also found geographical differences: European insurers outperformed their peers in the Americas and Asia Pacific on risk management, low carbon investment and engagement, and made up 11 of the 14 insurers taking tangible action on climate change. A quarter of European insurers had done nothing at all, however.

Aviva Insurance, Axa Group, Allianz Group and the People's Insurance Company of China (PICC) ranked as the top four insurers, with The Hartford, CNP Assurances Group and Prudential ranking further down the list.

The biggest laggards, according to the AODP, included Talanx, MassMutual, China Life Insurance and Zenkyoren.

The AODP rated the asset owners from A to D. Only Aviva took the A rating, with the majority of insurers receiving a D rating.

"Most asset owners are only starting to get to grips with the huge implications of climate change for their investments and far more action is needed across the board, but there can be little excuse for the world's biggest insurers to lag so far behind pension funds," said the AODP.

"By failing to protect their investments they are threatening their long-term capacity to cover future claims and placing the security of millions of clients at risk."

The report found that part of the reason for insurers' lack of engagement was a lack of expertise on their investment committees.

Only 8 percent of insurers had a role dedicated to integrating climate change risk into the investment process, compared to 16 percent of pension funds.

Insurers, the AODP continued, were also missing out on the opportunities from investing in the so-called green economy.

Just 0.2 percent of the $15.3tn of insurance assets on the index - or $30bn - is invested in low carbon energy.

Some 19 insurers disclosed low-carbon investments but these average just 0.8 percent of assets under management (AuM), while 51 pension funds have low-carbon investments accounting for an average of 3.5 percent of AuM.

If just 19 insurers were to match this rate of investment more than $100bn of capital would flow into the low-carbon economy, the AODP said.

European leadership was evidenced further by the number of Europe-based insurers signing up as members to ClimateWise, the global industry network committed to reducing the impact of climate change on society and the insurance industry.

The UK-based initiative was launched in 2007 and is dominated by European insurers. Members commit to implementing six principles in their business activities to support the transition to a low-carbon, climate-resilient future.

The AODP stated: "Insurers are beginning to recognise that their exposure to climate risk can impact the value of investment portfolios as much as underwriting portfolios, increasing financial exposure and potentially correlating risks across their balance sheets."

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