Insurance and Climate Change column

California Commissioner Explains Call for Insurer Divestment from Coal

By | February 4, 2016

One can say California Insurance Commissioner Dave Jones has a beef with coal.

Jones made a bold move on Jan. 25 when he asked all insurance companies doing business in California to voluntarily divest from their investments in thermal coal and become part of a nationwide drive to reduce carbon emissions and battle climate change.

To comply with this request would mean making no new investments, not renewing existing investments and selling or withdrawing from existing investments in thermal coal, according to the California Department of Insurance.

It should be noted that as of now Jones’ divestment request is voluntary, and specifically requests a divestment from any entity that either extracts or burns thermal coal or that derives 30 percent or more of its revenues from thermal coal.

The request followed an announcement by Jones in April that he plans initiate a data call that requires insurance companies to annually disclose their carbon-based investments, which includes investments in oil, gas and coal. The data call will be targeted to companies selling in the California market that have at least $100 million in premiums nationally.

The plan is to make the financial disclosures public. The CDI also plans to use the disclosures to assess the degree of financial risk posed to insurance companies by their investments in the carbon-based economy.

“That’s what we’ve done,” Jones said in a phone interview with Insurance Journal. “Both of those things are entirely within my authority as insurance commissioner.”

Immediately after he announced his divestment initiative, the Association of California Insurance Companies, part of the Property Casualty Insurers Association of America, issued a statement about insurers using investment income to offset repair and litigation costs to keep premiums in check.

“Insurers must retain the freedom to manage their investments so they can keep rates affordable for their customers,” ACIC President Mark Sektnan said in a statement. “Investments of insurers must first and foremost ensure the financial security of policyholders. Insurer investments must be low risk and easily liquidated in order to pay policyholder claims quickly in times of disaster.”

California Insurance Commissioner Dave Jones

California Insurance Commissioner Dave Jones

In the statement it’s noted that ACIC is communicating with its members about Jones’ initiative.

“Each insurer must craft balanced investment strategies that meet regulatory requirements and ensure the financial security of policyholders,” the statement reads. “We appreciate that the commissioner’s approach avoids overly restrictive mandates.”

From Jones’ perspective, insurers have a key role to play in the battle with climate change.

“They have a role as underwriters. They have a role as managers of $8.8 trillion in assets in the United States,” Jones said. “The insurance industry in the United States has, under management, $8.8 trillion in assets. They have a role as investors, as well.”

Jones, who last year announced his intent to run for attorney general in 2018, plays a major role in the National Association of Insurance Commissioners Climate Change and Global Warming Working Group as the 2015 chair. The composition of the working group for this year is not yet known, but considering his passion for the climate change topic, it’s a good bet he’ll be back on board.

Does he plan to take to coal battle to the working group and give it a national facet?

“This is an action by California’s insurance commissioner,” Jones replied. “It’s my hope that other states will follow. But each state is going to have to decide for itself, as is the case in our system of insurance, our state‑based insurance regulation system.”

The NAIC has for several years poked into how insurer investments may be impacted by climate change through a risk disclosure survey that has been used in the past to criticize the industry for a lack of preparedness in addressing climate-related risks and opportunities.

“We will continue to administer the NAIC Climate Risk Disclosure Survey, which we’ve been administering since 2010, which asks the qualitative questions,” Jones said. “The announcement I made last Monday is, I think, an evolution in the degree of specificity that I believe we should be getting from insurers.”

Jones’ coal divestment call follows footsteps laid down by a few European insurers. The insurance community in Europe took notice when Henri de Castries, chairman and CEO of French insurer AXA, announced in May 2015 that the company was ridding itself of investments in companies most exposed to coal-related activities.

That represents a $500 million Euro ($568.52 million) divestment. The company also committed to tripling its “green investment footprint” with the aim of reaching more than $3 billion EU ($3.41 billion) in investments by 2020.

“We’ve seen at least two major insurers, AXA and Allianz, announce last year that they were divesting from thermal coal in various ways,” Jones said.

California’s commissioner isn’t the only official to start putting pressure on coal.

The Obama administration last month ordered a moratorium on new leases for coal mined from federal lands, and in recent months there has been no shortage of action from indivdual states to impose new and tougher emission standards.

“We’ve seen California and other states in the United States impose a price on carbon through cap-and-trade or through direct taxes on the extraction of carbon,” Jones said. “We’ve seen significant new restrictions placed on utilities by states like California and other states in the United States on the amount of carbon they can burn.”

Jones’ anti-coal battle is part of a larger war on coal and global warming laid out in December in Paris, where world leaders came together to ink carbon-reduction agreements at the COP21 UN climate summit.

“We’ve seen all the nations of the world come together in Paris through the COP21 UN climate summit to make a series of agreements and commitments with regard to reducing reliance on carbon,” Jones said. “We’ve seen markets respond by dramatically reducing the share value or asset value of carbon holdings. One of the leading coal indices has seen an 85 percent drop in value over the last year or so.”

He may have been referring to the recent 85 percent drop in the Baltic Dry index, which measures how much it costs to ship “dry” commodities around the world – raw materials like grain, metal ore, coal and steel.

Jones said it is “very important that insurance companies” look carefully at how much they’re invested in carbon because he believes the political hammer is being positioned to reduce reliance on so-called dirty energy, and that will make any investment in carbon a bad one in the long run.

Gov. Jerry Brown signed a bill into law last year requiring state-regulated utilities to get 50 percent of their electricity from renewable energy sources, such as wind and solar, by 2030.

Mark Carney, the governor of the Bank of England and the chair of the G20 Financial Stability Board, in a September 2015 speech at Lloyd’s of London issued a strong warning to insurers and the financial services industry about the risk posed by carbon investments.

In his speech Carney said a reduction in burning fossil fuels as outlined by the Intergovernmental Panel on Climate Change to limit global temperature rises to 2 degrees above pre-industrial levels would render the vast majority of oil, gas and coal reserves “literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics.”

“The exposure of U.K. investors, including insurance companies, to these shifts is potentially huge,” Carney said. “Nineteen percent of (The Financial Times Stock Exchange 100) companies are in natural resource and extraction sectors; and a further 11 percent by value are in power utilities, chemicals, construction and industrial goods sectors. Globally, these two tiers of companies between them account for around one third of equity and fixed income assets.”

Carney also expressed his view that financing “the de-carbonisation of our economy” is a major opportunity for insurers as long-term investors.

“It implies a sweeping reallocation of resources and a technological revolution, with investment in long-term infrastructure assets at roughly quadruple the present rate,” he said.

The Financial Stability Board announced in December 2015 the establishment of an industry-led disclosure task force on climate-related financial risks with former New York Mayor Michael as chair. The voluntary climate-related financial risk disclosures would provide information to lenders, insurers, investors and other stakeholders, according to the board.

“There you have one of the leading financial regulators in the U.K., insurance regulator Mark Carney, also indicating that there are financial risks associated with insurance companies that are holding carbon,” Jones said. “All of these are important indicators of risk and things that insurance companies should be paying attention to. Our objective in asking that they voluntarily divest from thermal coal and our requirement that they disclose investments in other aspects of the carbon economy are both in recognition of the tremendous changes that are occurring, both from a policy perspective and in the market.”

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