What effect will climate change have on investment portfolios? The vast majority of insurers around the world are deliberating the question. But not quite as much in the US, which is only slowly catching up to its European and Asian counterparts.
Just over half, or 53%, of US insurers consider climate risk during their investment process, compared with 73% of European investors and 72% of Asian investors who say the same, according to a report released Thursday by Goldman Sachs Asset Management (GSAM). The investment firm surveyed about 275 CIOs, chief financial officers (CFOs), and other senior professionals.
Still, interest in environmental, social, and governance (ESG) investing as a whole has grown dramatically in recent years. Just 21% of global insurers did not consider ESG at all in their portfolios in 2020, versus 68% of respondents three years ago.
What changed? One explanation is the increase in the frequency and severity of extreme weather events, which has brought climate risk to the fore for many investors. In California, the area burned by wildfires has been increasing every year, according to the state government. In 2018, the Mendocino Complex Fire in Northern California was the largest fire on record, beating the previous record in 2017 from the Thomas Fire in Ventura and Santa Barbara counties.
Among companies, property and casualty (P&C) insurers and reinsurers are particularly sensitive to the risks. About 85% of reinsurers and 71% of P&C insurance businesses said they consider climate risk during their investment process, versus just 33% of health insurance companies that say the same. Reinsurers are particularly exposed to climate risk because they absorb losses from earthquakes, windstorms, fires, and floods not covered by primary insurance policies.
Investors considering how they can manage risk are also increasingly weighing the role that policy changes will have on their portfolio. For example, restrictions on carbon emissions could harm certain sectors, such as transportation.