Lloyd’s has advised the re/insurance industry to take a proactive approach to assess and protect against dangers of global asset-stranding and liabilities, as climate change-related regulation and taxation policies pose a growing threat to the security of portfolio investments.
Lloyd’s partnered with the University of Oxford Smith School of Enterprise and the Environment to investigate the potential dangers of stranded assets – assets that are subject to a sudden or unexpected write-down or devaluation – due to regulatory changes from climate change.
The issue of stranded assets caused by environmental factors has become increasingly high-profile in recent years, with assets suffering from premature devaluation as climate change is recognised as a growing phenomenon already changing and raising the global risk-scape.
According to the study, entire regions and global industries could potentially be stranded within a short timeframe as changes to the physical environment driven by climate change, and society’s response to these changes, could impact investment strategies and liabilities.
Ben Caldecott, Director of the Sustainable Finance Programme at the University of Oxford Smith School, commented; “Insurers and reinsurers price environment-related risks in their insurance policies but don’t always apply these same principles to their investments. Doing so would help avoid stranded assets and ensure investments are appropriately protected in order to meet liabilities.”
Some examples of potential dangers of asset-stranding, according to the Lloyd’s report, include: upstream energy assets as oil and coal reserves become stranded due to international, top-down carbon budget constraints, upstream energy liabilities, premature closure of coal power stations due to concerns about climate change and the fossil-fuel divestment campaign, an increase in political risk events due to government energy policies induced by climate-change concerns, and residential solar PV and electricity storage (in part connected to electric vehicles) impairing centralised electricity generation market.
Re/insurers’ residential property assets could also be at risk from devaluation from mandatory energy efficiency improvements reducing the value of the least efficient housing stock, and increasing the value of the most efficient housing stocks.
Insurers and reinsurers have been advised to stress-test portfolios to build a picture of their potential exposure to stranded assets and to consider the specific environmental characteristics of their investment portfolios, and further protect themselves by actively participating in the developing legislation and regulation around environmental policy.
Head of Innovation at Lloyd’s, Trevor Maynard, stressed that re/insurers need to collaborate with governments to address the impacts of climate change; “This study illustrates the importance of considering how climate change could impact the value of your assets, but more than that, it encourages the insurance industry to play a pro-active role in the development of policies and regulation with the knowledge and expertise that exists in this field.”