1. Cynthia McHale, Director Insurance Ceres
Climate Related Financial Disclosure and 2°C Scenario Analysis for Insurance Companies
IAIS Global Seminar
June 2017, London
Cynthia McHale, Director Insurance Ceres

2. Ceres’ Perspective on Climate Disclosure
Ceres and investors have pushed for improved climate risk disclosure in financial filings since 2003.
Our focus remains on improving disclosure of material climate risks and opportunities.
We encourage the use of Sustainability Accounting Standards Board (SASB) standards for financial filings.
Ceres continues to prioritize the use of comparable data and consistent reporting.

3. How Have Companies and Investors Supported the FSB Task Force?
Over 300 investors with more than $18 trillion in AUM wrote to G7 and G20 supporting the Paris Agreement, and FSB Task Force.
Additionally, 27 CEOs with $4.9 trillion AUM and $700 billion in revenues released a statement urging G20 acceptance of the FSB Task Force Recommendations.

4. 2 Degree Scenario Analysis of U.S. Insurers Fixed Income Investments
The FSB Task Force encourages forward-looking information through scenario analysis.
This information is important for investors and other stakeholders in understanding climate-related risks and vulnerabilities.
In this context, Ceres and 2DII analyzed 35 large U.S. insurance groups’ portfolios against the IEA 2°C scenario.
We focused on insurers’ Annual Financial Statements, Schedule D fixed income investments (70-90% of investment exposure.)
Key data sources included A.M. Best (group level holdings); International Energy Agency (IEA) 450S Scenario; GlobalData Asset-level data (energy sector data for electric power, oil, gas and coal mining); WardsAuto/Auto Forecast Solutions data (industrial and automotive sectors)

5. Climate-related Risk for Insurers – Both Direct and Indirect
Physical Risk
Company 1
Investee Companies
Climate-related Risks
Company 2
Transition Risk
Company 3
Legal Risk …
Liability Side
Asset Side
Insurance Companies

6. Exposure Assessment: Which investments are most at risk?
In 2016, Moody’s released a ‘heat map’ of sectors at risk from environmental/climate risk and trends, which offers a good proxy for high-level exposure assessment.
‘Elevated’ face risk in the next 3-5 years
‘Emerging face risk after 5 years
Risk Level
Sector
Immediate Elevated
Independent Power Producers, Coal & Consumable Fuels
Emerging Elevated
Steel, Aluminum, Oil & Gas E&P, Construction Materials, Diversified Metals & Mining, Auto Manufacturers
Emerging Moderate
Regulated Utilities, Airlines, Integrated Oil & Gas, Paper, Oil & Gas services, Auto Parts, Gas Utilities
Low
Marine, Diversified Chemicals, Industrial Gases, Marine Ports
Source: Moody’s Environmental Risk Heat Map

7. Results: U.S. Insurance Groups have varying exposure in ‘risky’ sectors.
Considerable variation between portfolios
Range of 3 to 28% in ‘emerging’ and ‘elevated’ risk sectors
Moody’s average = 14%
Source: AM Best Schedule D. Sectors include classified by Moody’s as Emerging or Elevated Environmental Risk.

8. Results: Long-term risk -> maturity matters!
Holdings in higher risk sectors can be mitigated with shorter maturity/holding periods.
Yet 6 of the 35 insurance groups have a high fraction of holdings in risky sectors and a high fraction of long maturity bonds.
Source: AM Best Schedule D. Sectors include classified by Moody’s as Emerging or Elevated Environmental Risk.

9. Ceres and 2DII’s Key Findings
2-degree scenario (2DS) analysis (transition risks only) of the portfolios of 35 large U.S. insurance groups shows:
Many insurers are over-exposed relative to 2°C in various technologies facing transition risk.
Insurers are also under-exposed to low carbon/clean energy opportunities in a 2°C world.
Financial implications of various climate change scenarios, including a 2°C world, are uncertain but potentially material for insurers.

10. 2 Degree Scenario Analysis – An Important Methodology to Manage Portfolio Risk
There is value in the process even an approximate answer is a useful exercise.
Scenario analysis can be many things:
Easy: Qualitative “thought experiment”
Medium: “Top-down” averaged analysis
Hard/emerging: Bottom-up asset -> company analysis (asset-side)
FSB Task Force recommendation signals companies to ‘start-the-journey’ and open source tools already exist.
European regulators are already using 2DS to compare regulated entities and examine potential systemic risks.