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The Actuary The magazine of the Institute & Faculty of Actuaries

Action needed to avoid climate change leaving insurance industry with ‘stranded assets’

Insurance companies worldwide could face unanticipated asset write-downs or conversions to liabilities as a result of climate change, according to a report from Lloyd’s.

Insurers urged to consider environment-related risks with their investments ©Shutterstock
Insurers urged to consider environment-related risks with their investments ©Shutterstock

Stranded assets: The transition to a low-carbon economy argues that firms should stress test portfolios to evaluate their assets’ exposure to the effects of climate change and the devaluating impact it could have on them.

It urges closer involvement by investors in the governance processes of businesses in which they invest, playing an active role in the development of legislation and regulation around environmental policy.

Lloyd’s head of innovation, Trevor Maynard, said: “As governments across the globe put in place frameworks to address the causes of climate change, insurers and reinsurers need to ensure they are not caught out on the wrong side of the debate.

“This study illustrates the importance of considering how climate change could impact the value of your assets, but more than that, it encourages the insurance industry to play a pro-active role in the development of policies and regulation with the knowledge and expertise that exists in this field.”

The study involved Lloyd’s, in partnership with the University of Oxford’s Smith School, creating eight detailed scenarios in which assets could become ‘stranded’, which are:

Oil and coal reserves become stranded due to international, top-down carbon budget constraints

Third-party liability claims against companies, and their D&Os, responsible for climate change

Premature closure of coal power stations due to concerns about climate change and the fossil-fuel divestment campaign

An increase in political risk events due to government energy policies induced by climate-change concerns

Residential solar PV and electricity storage, in part connected to electric vehicles, impairs the centralised electricity generation market

Mandatory energy efficiency improvements reduce the value of the least efficient housing stock and increase the value of the most efficient housing stock

Property industry professionals and governments are sued for negligence for not disclosing, reporting, or being misleading on the climate change impacts for investors

Pressure to reduce carbon emissions increases the value of newer, more efficient ships, and reduces the value of older ships.

If these hypothetical situations were to come to pass, they could potentially strand entire regions and global industries within a short timeframe, according to the report.

It adds that businesses should screen their investments based on environmental characteristics, and divest from projects that do not consider the impacts of climate change.

University of Oxford’s Smith School sustainable finance programme director, Ben Caldecott, said: “Insurers and reinsurers price environment-related risks in their insurance policies but don’t always apply these same principles to their investments.

“Doing so would help avoid stranded assets and ensure investments are appropriately protected in order to meet liabilities.”