Dave Jones’ climate risk survey is actually about political risk
Interesting findings in study conducted by @2degreesinvest on behalf of the @CDInews of the “climate-related financial risks” in the investment books of 672 insurers with more than $100M in annual premiums that do business in California. 1/14https://t.co/HQai7M2omH:::
— R.J. Lehmann (@raylehmann) May 9, 2018
It’s billed as a “stress test,” but that’s a bit misleading, IMHO. Insurers’ investments certainly face risks from climate change. E.g., life insurers are major commercial real estate lenders. Collateral lying in coastal areas is directly at risk from rising seas. 2/14
— R.J. Lehmann (@raylehmann) May 9, 2018
This report doesn’t measure that sort of risk. Instead, it assesses impact on value of physical assets (power plants, oil fields) held by fossil fuel-related companies in which insurers are invested of transitioning to energy mix consistent with 2°C increase in global temps. 3/14
— R.J. Lehmann (@raylehmann) May 9, 2018
Since that transition is unlikely to happen without significant changes in legal/regulatory regimes, report really measures political risk, not climate risk. And it looks only at the potential severity of that risk, offering no assessment of its likelihood to transpire. 4/14
— R.J. Lehmann (@raylehmann) May 9, 2018
The good news is that @2degreesinvest finds insurers’ combined equity and fixed-income portfolios are aligned with the target trajectories for a 2°C increase in temps in the areas of both oil and gas production. 5/14https://t.co/wCwhuykqQK:::
— R.J. Lehmann (@raylehmann) May 9, 2018
The less sanguine finding, and the one seized on by @CA_DaveJones, is that the trajectory of insurers’ investment portfolio in “locked-in” coal-fired power plant capacity of electric utilities is *not* aligned with 2°C target. Significant coal retirements are needed. 6/14
— R.J. Lehmann (@raylehmann) May 9, 2018
Jones publicly declared two years ago that insurers should divest from thermal coal. He reiterated that stance today, on grounds that “thermal coal investments run the risk of being stranded assets on the books of insurance companies.” 7/14https://t.co/6LorWxelGH
— R.J. Lehmann (@raylehmann) May 9, 2018
But is that really a significant risk? @2degreesinvest found that, of insurers’ $4 trillion in investments, $10.5 billion was held in thermal coal enterprises. In other words, just 0.26% of their portfolio. 8/14
— R.J. Lehmann (@raylehmann) May 9, 2018
Moreover, while the snapshot report didn’t offer detailed breakdowns by sector, it found 87% of total investments were in fixed-income. For sure, depreciation of utilities’ coal-fired assets are a problem for the equity. Not clear they’re a problem for credit worthiness. 9/14
— R.J. Lehmann (@raylehmann) May 9, 2018
They *could* be, but largely only if regulators don’t allow these monopolies to get rate on-line to finance replacing that capacity. So, now we’re talking about the intersection of TWO political risks, and the report doesn’t offer probability assessments for either one. 10/14
— R.J. Lehmann (@raylehmann) May 9, 2018
The time frame analyzed in the “stress test” is five years. So, to buy into the “stranded asset” theory, one would have to believe that over the next five years (at least 2.5 of them under the Trump admin, and with GOP controlling most state govts) there will be… 11/14
— R.J. Lehmann (@raylehmann) May 9, 2018
…such a radical reduction in demand for coal, and PUCs will be so stingy in allowing monopoly utilities to recover the cost of shifting their fuel mix, that insurers will be unable to account for the sudden deteriorated credit quality of 0.26% of their investment book. 12/14
— R.J. Lehmann (@raylehmann) May 9, 2018
That even in a period of broadly rising rates, they’d be unable to write down or swap out those instruments with equally attractive options, well-matched to the duration and nature of their underwriting liabilities. 13/14
— R.J. Lehmann (@raylehmann) May 9, 2018
I mean, maybe?! We’re in the 10th anniversary of the financial crisis. Strange things sometimes happen. But it certainly doesn’t seem likely. And the @2degreesinvest report makes no claim that it is. 14/14
— R.J. Lehmann (@raylehmann) May 9, 2018