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California's decarbonization efforts are not translating into
more green and less fossil fuel investments by leading US insurance
firms operating in the state, new S&P Global Market
Intelligence Analysis shows.
Instead, the "Climate Risk and Resilience
Analysis" reveals that the insurance sector's fossil fuel
investments far outpaced "green" investments in 2018 and 2019.
Commissioned by the California Department of Insurance (CDI) in
2020 and released 18 April, the analysis found that at least
$476.72 billion, or 9.42%, of the firms' $5.06 trillion in managed
assets were invested in fossil fuels in 2018. The percentage was
almost unchanged in 2019, when 9.41% of investments, or about
$536.22 billion of $5.697 trillion, were placed in fossil
fuels.
At the same time, these firms invested $11.4 billion in green
bonds to pay for environmentally beneficial energy efficiency as
well as clean energy and transportation projects in 2019, more than
doubling the $5.03 billion invested a year earlier.
Following the report's release, California Insurance
Commissioner Ricardo Lara, who has spearheaded the state's climate
risk disclosure efforts from this sector, said insurance firms need
to do more to protect consumers and the environment from the
billions of dollars in catastrophic climate-related losses caused
by wildfires.
"Most exhaustive study"
Terming the S&P Global Market Intelligence report "the most
exhaustive study of fossil fuel investments by insurance companies
ever done by any US state," Lara said, "for the first time, we are
disclosing fossil fuel investments while also measuring insurance
companies' commitment to sustainability through their investments
in green bonds."
Insurance firms act as both underwriters and investors. They
invest premiums paid by customers to help pay claims related to
climate-fueled damage that have run into the billions in
California, mainly due to the wildfires ravaging the state. In
2018, California's Camp Fire resulted in insured losses of $12
billion and was the costliest event ever globally, according to the
analysis.
Since states primarily regulate insurance firms in the US, CDI
has been collecting investment data since 2015 from insurance firms
with $100 million in premiums to get an idea of their exposure to
climate risk. In 2020, CDI commissioned S&P Global Market
Intelligence—as it had done two years prior—to analyze the
investments approximately 1,200 insurance firms made during 2018
and 2019.
Lacks underwriting data
It did not, however, analyze the fossil fuel assets that
insurance firms have underwritten, a major gap in the data, Public
Citizen climate financial policy campaigner East Peterson-Trujillo
told Net-Zero Business Daily by S&P Global Commodity
Insights 20 April.
In response to the report and Lara's statement, the Washington
DC-based trade group American Property Casualty Insurance
Association (APCIA) said insurers look forward to working with the
CDI and other regulatory agencies to "facilitating a more
environmentally resilient economy."
"We are pleased the CDI recognized that insurers doubled their
investments in green bonds in just one year," Deni Ritter, APCIA
assistant vice president for state government affairs, wrote in a
21 April statement to Net-Zero Business Daily. "Insurers
have a unique role in fostering development of more green
technologies and tools by making capital and protection available
to industries as they transition to a lower carbon future."
Although the CDI report provides useful data, Ritter cautioned
against using the CDI report "exclusively" to evaluate the
climate-related investment or commitments of any particular
company.
"Also," she added, "this report should not be taken as a
company's current investment strategy given the lag in reporting
time cycles."
More states mandate transparency this
fall
Work to enhance transparency in the insurance sector when it
comes to climate risk is not limited to California. Nearly a
fortnight earlier, the National Association of Insurance
Commissioners—a trade group for state insurance regulators like
Lara—unveiled an updated reporting
format in line with international standards. The revised reporting
format would require insurance companies to disclose in detail the
climate-related liabilities and risks they face from investing in
and underwriting fossil fuel companies.
At least 15 states, including California, have agreed to adopt
this reporting format beginning in November. NAIC said the format
will apply to more than 80% of insurance firms with at least $100
million in premiums.
"The NAIC climate risk survey supplements California's fossil
fuel and green investment report, allowing us to hold insurers
accountable for addressing climate risk across their entire
operations," CDI spokesman Michael Soller wrote in a 20 April email
to Net-Zero Business Daily.
However, the APCIA has raised concerns about the implementation
timeframe and the ability of small and medium-sized companies to
comply.
"For these companies, there simply may not be enough time or
they may not have the resources to provide useful narrative
responses as currently proposed, considering the internal
governance process that will be needed for thorough responses,"
said David Snyder, APCIA vice president, international policy and
counsel, said in a 22 March statement.
Good starting point
Sustainable investors see the climate risk analysis as providing
a "good" starting point for California to assess the state's
exposure to fossil fuels, which is "clearly and irrefutably" a big
part of the climate problem, Steven Rothstein, managing director of
Ceres' Accelerator for Sustainable Capital Markets, said in a 20
April interview.
Rothstein said the first step to addressing any problem as
complex as climate change is to measure the size of the
problem.
So, he added, "having data is a critical element," and the
California commissioner and his team should be lauded for taking
this step.
The analysis allows the regulator and the public to see that
insurance firms are investing nearly 10% of the premiums consumers
pay into assets that are causing harm, Rothstein said.
Report lacks detail on low-, zero-carbon
investments
While the analysis reveals the extent of fossil fuel investment,
it does not detail what percentage of those investments is directed
towards clean hydrogen or carbon capture and storage technology or
development of renewables.
It does uncover the portion of total fossil fuel investments
directed specifically towards mining coal and extracting oil from
tar sands. The data show that $3.16 billion in 2018 and $3.69
billion in 2019 went directly to tar sands projects where insurance
companies had at least a 50% investment.
The Consumer Federation of America (CFA) wants state insurance
agencies to go further than just assessing the exposure of
insurance firms to climate change-causing fossil fuel assets.
"The decisions about which risks to insure and which not to
cover have huge implications for the climate, of course, but also
for consumers," Douglas Heller, CFA director of insurance, told
Net-Zero Business Daily. "When we face higher property
insurance premiums due to growing catastrophic exposure, we must
remember that the availability of insurance coverage was crucial to
supporting the fossil fuel projects that are driving
climate-induced catastrophes."
In early 2022, insurance companies AIG and Chubb exited parts of
the California insurance market due to increased costs associated
with climate-fueled wildfires, according to Public Citizen's
Peterson-Trujillo.
In other words, "insurance companies are fueling climate change
by investing in fossil fuels and at the same time abandoning
communities who need coverage to protect themselves from climate
disasters," they said.
Responding to such concerns, APCIA's Ritter said the strength of
the insurance industry and its ability to fulfill the commitments
to its policyholders relies on a robust and resilient investment
strategy.
"Each insurer incorporates its own strategy in managing their
investment portfolio," Ritter wrote, adding "the diversity of
investment strategies is reflected in insurers' governance
practices, investments, and underwriting decision-making process,
resulting in insurers taking very different approaches to their
investments and business practices. This diversity brings strength
and stability to the industry overall by avoiding concentration of
investment risks."
Posted 22 April 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.