Insurers risk financial stability through energy holdings, report says

U.S. insurers are risking financial stability by holding $459 billion of energy-related investments without considering the “broad and deep” threat that climate change poses to the assets, according to an environmental advocacy group.

Ameriprise Financial Inc., Lincoln National Corp. and Voya Financial Inc. have more than 10 percent of their bond investments in the oil and gas sectors, roughly double the median of the industry, Boston-based Ceres said in a report Tuesday. Prudential Financial Inc., with the biggest equity and bond holdings in oil and gas of the 40 insurer groups analyzed, has about 6.3 percent of its bond portfolio in those investments.

Investments in fossil-fuel companies are a “systemic financial risk” as the holdings may decline amid a focus on renewable energy, Ceres said. Sovereign wealth funds and European insurers including France’s Axa SA and Germany’s Allianz SE committed to exiting some coal-related holdings as global leaders step up efforts to limit effects from climate change. Meanwhile, some U.S.-based firms are sticking with the investments, the Ceres report shows.

“The impact of climate change on the insurance sector is expected to be broad and deep, affecting companies’ revenues, investments, overall profitability, and, for some insurers, their financial stability,” the researchers said in the report. Ceres is an advocacy group representing investors, environmental organizations and groups that promote social responsibility. Consulting firm Mercer also contributed to the report.

Cynthia McHale, director of the insurance program at Ceres, said in a phone interview that insurers face an unprecedented challenge after 195 nations met in Paris in December and agreed to reduce worldwide carbon emissions.

“There’s a global commitment to limiting climate change,” she said. “Well, that requires that we move off fossil fuels. So that’s a fundamental shift that we have never before encountered.”

California Insurance Commissioner Dave Jones urged insurers earlier this year to voluntarily divest from thermal coal, and is requiring those companies to annually disclose carbon-based investments, including holdings in oil, gas and coal. He said investors face “a significant risk” from policy changes to limit global warming.

“If the international community, nations, states and local governments adopt the policies necessary to limit global warming to 2 degrees Celsius, then the value of holdings in the carbon economy will diminish dramatically if not drop to zero,” Jones said in an interview.

Robert Hartwig, president of the Insurance Information Institute, said at the time of Jones’s announcement in January that insurers need flexibility to diversify their portfolios.
“Generally speaking, there is going to be an energy component in the portfolio of virtually every insurer,” he said.

McHale said that Ceres isn’t urging insurers to divest energy holdings. Instead, the companies should work to understand the risk that could come from the shift away from fossil fuels, she said.

“What we are advocating is shareholder activism,” McHale said. “If you hold shares in Exxon or Chevron or you’re a significant bond investor in the oil and gas industry, you need to really step up and make sure that you are talking to those companies, that you understand how they’re managing through this energy transition. And if they’re not managing it, then maybe there’s too much risk there.”