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Calif. unveils climate-related financial risk stress test

Calif. unveils climate-related financial risk stress test

California Insurance Commissioner Dave Jones has unveiled a climate-related financial risk stress test and analysis of insurance company investments in fossil fuels.

The department engaged the Paris-based think tank 2° Investing Initiative to conduct this analysis for insurers in the state’s market with more than $100 million in annual premiums, according to a statement on Tuesday. The research led to a sample of 672 insurers with more than $4 trillion in investments, nearly 87% of which is held in fixed-income portfolios. 

“The climate-related financial risk to insurers’ investments in thermal coal, other fossil fuels and fossil fuel enterprises should not be ignored,” Mr. Jones said in the statement. “As a financial regulator, I want insurers to consider climate-related financial risks, including risks to their investments.”

The results of the scenario analysis are consistent with Mr. Jones’ Climate Risk Carbon Initiative determination that thermal coal presents long-term financial risks for investors, according to the statement. 

Cynthia McHaledirector of the insurance program for Boston-based investor coalition and sustainability advocacy group Ceres, encouraged all insurers to incorporate 2° scenario analysis into their business strategies. The 2° scenario refers to the energy system deployment pathway and emissions trajectory consistent with at least a 50% chance of limiting the average global temperature increase to 2°C.

Ms. McHale said in the statement that “2° scenario planning strengthens an insurer’s assessment of climate risks and opportunities and positions the insurer to adapt and prosper in a carbon-constrained future.”

Individual reports will be made available to all 672 insurers and will explain how investment plans aligned with different climate scenarios, where the individual insurers rank compared to their peers and which securities are driving the climate risk exposure of their investment portfolios. These results will help insurers apply the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, according to the department.




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