While many financial institutions around the world are placing greater focus on climate change as a key strategic issue, the US life insurance sector has been relatively modest in its actions to date. For example, some US life insurers have put in place policies to limit or prohibit investments in coal, but other financial institutions are going further by committing to align their entire portfolios with key emissions-reduction targets. Moreover, institutions representing over $100 trillion in assets are supporting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), but this includes just a handful of US-based life insurers.
In our conversations with life insurers, climate change is often seen as an important issue, but not an urgent one. Life insurers face significant headwinds, not least of which is the unrelenting and existential pressure caused by ultra-low interest rates, so it is understandable that climate change may be taking a back seat to other issues. But while it may be understandable, we believe it is a mistake.
From droughts and wildfires to storms and floods, the consequences of climate change are becoming increasingly present in our daily lives. In the coming years, the global economy will need to undergo massive shifts in order to avert a climate catastrophe. To maintain customers’ hard-earned trust into the 21st century and beyond, life insurers will need to develop and communicate a strategy on how they will successfully manage the impact of climate change on their businesses. Life insurers have spent decades cultivating brands synonymous with stability, safety and reliability, reinforced by their commitment to managing their businesses for the long-term. But those that hesitate to respond to climate-related challenges and opportunities will soon find themselves out-of-step with customers, employees, regulators, policymakers, and peer financial institutions — and just as importantly, with the very essence of why they exist: to meet long-term promises that no other institutions can.
Despite relatively limited focus on climate change to date, the US life insurance sector undoubtedly has the ability to meet the challenge at hand. For centuries, it has successfully navigated an uncertain and changing economy to fulfill its obligations. Responding to climate change can be the next chapter in this tradition. However, it will require a change in mindset. Climate change can no longer just be seen as an issue for the Corporate Social Responsibility office. Sustainability must become a priority for the business as a whole.
In this paper, we highlight six concrete, no-regret actions that US life insurers should take to respond to the challenges and opportunities presented by climate change.
1Assess and mitigate transition risk in the corporate bond portfolio
Several of the sectors that have historically provided life insurers with dependable long-term returns are highly exposed to climate transition risk. To mitigate climate transition risk in the bond portfolio, life insurers can consider an array of approaches, including incorporating climate change as a factor in asset allocation and limit setting processes, as well as conducting issuer-level scenario-based transition risk assessments.
2Assess and mitigate physical risk in the real estate portfolio
For large real estate investors including life insurers, there is an urgent need to incorporate readily available climate data into the investment process. Investors must also must understand their property insurance needs in light of the new threats, explore the possibility of retrofitting or reinforcing existing structures, and include physical risks in stress testing exercises across the investment portfolio.
3Consider emerging investment opportunities in low-carbon real assets and climate-resilient infrastructure
Climate-savvy investors that develop the capability to assess low-carbon real assets and climate-resilient infrastructure could see a step-change in the number of investable opportunities that are available. Life insurers are uniquely well-positioned to capitalize because of a liability structure that makes it possible to invest in long-term illiquid assets.
4Appeal to values-oriented customers by highlighting a climate-responsible investment strategy
As more and more ESG-focused investors reach the age when they begin to consider life and retirement products, life insurers will have to strengthen their marketing on climate change and ESG. Investors that have relied on ESG funds to build their retirement nest eggs are unlikely to simply abandon their values-oriented approach when considering annuities or life insurance.
5Improve climate-related disclosures to prepare for heightened expectations of regulators and other external stakeholders
Launched in 2016, the TCFD has developed a disclosure framework covering four areas — governance, strategy, risk management, and metrics and targets — that has now been supported by over 1,000 organizations, including global financial institutions that represent over $100 trillion in assets. The TCFD recommendations have emerged as the global standard for climate-related disclosures, including for insurers.
6Consider setting investment targets or commitments at the firm level
Some of the most ambitious global insurers have committed to align their entire investment portfolios with long-term emissions reduction targets. Other major institutional investors have set targets for dollar amounts allocated to financing green projects.