Insurers Address Climate Risk with the Help of Asset Managers
November 4, 2021 — Boston
As insurers face internal and external pressure to enact measures that address climate risk, asset managers are prepared to assist
The material impacts of climate change and recent updates to guidance from state regulators have prompted insurers to integrate climate change considerations, including total portfolio emissions, into their investment process, according to Cerulli’s report, U.S. Insurance General Accounts 2021: Adopting New Strategies for Global Challenges.
Insurers’ adoption of responsible investing is evolving rapidly. A majority (60%) of insurers with a responsible investment policy have adopted that policy within the last five years. Only 11% have been investing responsibly for more than 10 years. Driving this precipitous increase is the risk of climate change—or the “environmental” piece of environment, social, and governance (ESG) investing. “Insurers are particularly vulnerable to the effect of climate change. For property and casualty (P&C) insurers and reinsurers, climate change could have a significant impact on the underwriting side of their business as severe weather and/or coastal flooding cause damage to insured properties,” comments Chris Swansey, research analyst.
According to the research, climate considerations are not yet driving investment decisions; however, insurers are leveraging their investment policy statements to integrate climate change considerations. Almost two-thirds (65%) of insurers reference CO2 emissions/carbon intensity in their investment policy statements, followed by natural resources saved (50%) and energy efficiency (45%). While most insurers reference CO2 emissions or carbon intensity broadly in their investment policy statements, the research notes that only 10% have set specific targets.
Asset managers are well prepared to meet insurers’ ESG demands, responding to climate change in the portfolio construction and security analysis stages of the investment decision making process. Three-quarters (76%) of asset managers with insurance-focused businesses and are UNPRI signatories conduct climate scenario analysis to uncover climate risks in their clients’ portfolios. Most (89%) are conducting that analysis in alignment with the goals of the Paris Agreement of a 2-degree Celsius or lower increase over pre-industrial levels. In addition, they are using emissions data or analysis to inform investment decision making. A vast majority report reducing portfolio exposure to emissions-intensive holdings (82%) and using active ownership methods to persuade underlying companies to integrate climate change considerations (73%).
While progress is being made, ESG adoption among insurers in their general accounts is still in its early stage. The report points to increased demand for ESG-focused products, enhanced reporting on climate metrics, and alignment with global industry standards as impending developments, but these will take time to mature. “Ultimately, internal pressure from stakeholders and external pressure from potential regulatory changes have made ESG an issue that cannot be ignored,” Swansey concludes.
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Note to editors
These findings and more are from The Cerulli Report―U.S. Insurance General Accounts 2021: Adopting New Strategies for Global Challenges.