Insurance and Climate Change column

The Polar Vortex And Climate Change

By | January 31, 2019

A new report outlines the numerous risks insurers face from climate change.

The report from Sustainalytics, a provider of ESG (environmental, social and governance) and corporate governance products and services, shows that property/casualty insurers face two key points of exposure to climate risks in 2019 and beyond: escalating cost of payouts for climate change-driven catastrophes; carbon-related risks from underwriting and investment activities.

The report draws on a study from Aon Benfield that shows 2017 was the costliest year on record for weather related damages, with $344 billion in total economic losses globally and insured losses reaching $132 billion, three times the 2000-2016 average.

“On top of the physical risks, P&C insurers’ underwriting and investment activities expose them to indirect carbon risks,” the report states. “By underwriting coverage for fossil fuel projects, the insurance industry enables projects that worsen climate change, which increases the frequency and severity of extreme weather.”

As large investors, insurers can direct funding to companies and assets geared towards the transition to a low-carbon economy – currently only 1 percent of assets invested by 80 major global insurers were allocated to low-carbon investments, according to the report.

The report also notes that some European insurers like AXA, Allianz, Zurich and Generali have announced restrictions on insuring and investing in coal.

Suncorp leads European insurers by ranking in the report as having the lowest level of unmanaged risk and the highest scores in integration management and responsible asset management, and as an insurer that has steered clear of fossil fuel controversies.

“In August 2017, Suncorp adopted a responsible investment policy, which also applies to its external investment managers,” the report states. “The policy includes commitments to increase climate-related investments, such as green bonds, renewable energy infrastructure and climate change adaptation and mitigation innovations.”

Suncorp’s reported key action items for 2019 and 2020 include identifying and assessing risks and opportunities linked to climate change, carbon transition issues and physical climate impacts, according to the report.

Climate Change and the Economy

How broadly will climate change run through the world economy?

A new report shows climate change disrupting supply chains, disabling operations and driving away customers.

The report is based on disclosures collected by CDP, a U.K.-based nonprofit that asks companies to report their environmental impact, including the risks and opportunities they believe climate change presents for their businesses. More than 7,000 companies worldwide filed reports for 2018, including more than 1,800 from the U.S.

CDP, formerly called the Carbon Disclosure Project, earlier this month released letter grades for those companies. Thirty U.S.-based companies got an “A” grade, the most of any country. Next on the list were Japan, with 25 top-scoring companies, and France with 22.

The annual A List names international businesses leading on environmental performance, and this year more than 140 corporations were recognized as the pioneers acting on climate change, water security and deforestation, and building a future economy that works for both people and planet.

Accenture, Bank of America, Cisco Systems, Inc., Johnson & Johnson, Microsoft Corp. and Oracle Corp. were on the list. A double-check of the list yielded only one insurer, MS&AD Insurance Group Holdings Inc., a Japanese insurer with businesses including Mitsui Sumitomo Insurance and Aioi Nissay Dowa Insurance. The company is listed on the Nikkei 225.

Polar Vortex

If you are reading about the “Polar vortex,” or experiencing it, you may, like the U.S. president, be asking “What happened to global warming?”

BBC News tackled that question in an article titled “Is polar vortex linked to climate change?”

The article quoted President Donald Trump when he tweeted recently: “In the beautiful Midwest, wind chill temperatures are reaching minus 60 degrees, the coldest ever recorded. In coming days, expected to get even colder. People can’t last outside even for minutes. What the hell is going on with Global Warming? Please come back fast, we need you!”

It also bears a Tweet from the National Oceanic and Atmospheric Administration: “Winter storms don’t prove that global warming isn’t happening.

The article explains that the polar vortex is “a great gyre of air” that forms each winter and circulates above the North Pole in the stratosphere, and that what’s occurring is a breakdown of the polar vortex.

There is debate whether this “breakdown” of the polar vortex is becoming more common, while some researchers say they suspect climate change is behind it.

Jennifer Francis, a senior scientist at the Woods Hole Research Centre, is quoted in the article. She argues that melting sea ice in the Arctic may be linked to changes in the polar vortex, as the dark, open ocean absorbs more heat than reflective ice, causing a hot spot that, along with changes in the jet stream driven by climate change, could cause the polar vortex to break down.

Other experts say there is no convincing evidence that these events are happening more often.

The article does offer readers a good rule of thumb: weather is what is happening outside your house now, while climate is what happens over many years.

In other words, it can be frigid where you live, but the world as a whole could still be getting warmer. Just their thoughts on it.

You Can Win with Climate Change

A Forbes article, which focuses on Winning At Climate Change Investing, says many “people simply do not perceive the effects of climate change as exerting a significantly negative impact” on the economy or on their daily lives, but that this perception will change over the next five to 10 years.

One big issue for investors is that it’s impossible to know what event or tipping point will cause a change in attitudes sufficient enough to create an “investing catalyst.”

“This timing issue has already created problems for some very smart capital allocators,” the article states.

The author, Erik Kobayashi-Solomon, is founder and managing director Of Framework Investing.

The article states that intelligent climate change investors must take steps to “limit economic exposure to expensive failures while, at the same time, preserving exposure to the enormous upside potential brought about by the upcoming paradigm shift.”

He splits technologies into three categories:

  • Evolutionary application of current technology (such as improvements to Lithium ion batteries and development of a powerwall)
  • Novel adaptation of current technology (applying sensors and pattern recognition algorithms, IoT, robots, LEDs, and crop sciences to grow food in indoor vertical farms)
  • Revolutionary development of new science (clean meat, algal biofuels)

“Structuring a portfolio that contains a combination of low- to high-leverage positions in a way that insulates an investor from downside risks while still maintaining that enviable quality of ‘convexity’ (i.e., positions become more profitable the more profitable they are…) is something I have thought a great deal about and which I have, in fact, written an entire book about!” Kobayashi-Solomon writes.

“My next step is to apply the theory to these types of investments. Stay tuned.”

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Latest Comments

  • February 7, 2019 at 9:21 am
    Rosenblatt says:
    No worries Jerry - I talk to myself all the time ... some of the best conversations I have are with myself :D
  • February 6, 2019 at 6:44 pm
    jerry says:
    I meant Rosenblatt. Oops :P
  • February 6, 2019 at 6:44 pm
    Jerry says:
    Jerry, once again you're the bigger man, but once again it doesn't seem to matter. Craig and Jax are clearly trolls and it's sad that the moderators here don't make any effort... read more

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