On May 24, 2016, the investor group Ceres released a report that analyzes the fossil fuel investments of 40 major U.S. insurance groups. The report found that many U.S. insurance groups are significantly invested in oil and gas and other fossil fuels. In the aggregate, these groups hold fossil fuel investments totaling $459 billion, based on 2014 year-end filings.
The report labels fossil fuel holdings "increasingly risky," citing carbon asset risk exposure, as well as the frequency of bankruptcies and credit downgrades among oil and gas companies. Ceres president Mindy Lubber stated that the "global trend toward clean energy has significant implications for fossil fuel companies and their investors if action is not taken to manage climate risks. Our hope is the report recommendations provide a roadmap for insurers and regulators to better manage these risks and seize opportunities that come from this energy transformation."
Of the $459 billion in total fossil fuel investments, $237 billion are held in the electric/gas utilities sector, while $221 billion are held in the oil and gas sector. Insurers' coal investments accounted for only $1.8 billion, while investments in renewable energy accounted for $7.2 billion. The report notes that insurers' investments in renewable energy are growing but asserts that these investments "do not yet reflect the scale of clean energy investment opportunities required to avoid dangerous climate change." The report also cites a Mercer study that states that average annual expected returns on clean energy investments are expected to increase from more than 6 percent to as high as 10 percent.
The report states that the risks of fossil fuel investments are even greater in light of the Paris Agreement, citing estimates that one-third of oil reserves, half of natural gas reserves, and more than 80 percent of coal reserves from 2010 to 2050 will need to remain unused in order to meet the Paris Agreement's goal of limiting global temperature increase to below two degrees Celsius.
The report provides several recommendations for insurers and regulators to manage the risks associated with fossil fuel investments. First, the report calls on insurance boards of directors to make climate risk management an integral part of their investment decision-making. The report also recommends that boards consider requiring the insurers' Investment Policy Statement to expressly include a climate risk management strategy, and that the strategy be reviewed annually.
As for regulators, the report recommends requiring insurers to disclose their investments and adopt a universally recognized source to provide that information, such as Supplemental Investment Risk Interrogatories.
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