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Analysis finds Calif. insurers' energy investments face physical climate risks

A new study has found that portions of the energy portfolio investments of insurers in California are exposed to climate-related physical risks associated with flooding, water scarcity and wildfires.

Released Jan. 4, the scenario analysis was performed for the California Department of Insurance by the 2 Degrees Investing Initiative and examined the bond and stock market investment portfolios of insurers operating in California. The report was prompted by California Insurance Commissioner Dave Jones, who has urged insurance companies to divest from thermal coal-fired generation. A number of republican state attorneys generation and a governor in 2017 threatened to sue Jones if he continued that divestment push.

The report focused on insurers that each hold at least $100 million in premiums, and those included in the study together hold about $4.5 trillion in investments.

"Physical climate risks have been identified by financial regulators and insurance companies as a major financial risk to portfolios," the report said. "Physical risks can impact companies' cash flows and, by extension, the prices of financial securities and value of financial portfolios."

The United Nations' Intergovernmental Panel on Climate Change in October 2018 warned that the world will need to quickly slash carbon dioxide emissions and drastically scale up low-carbon infrastructure investments over the next decade if it is to limit and mitigate the impacts of climate change.

The new analysis comes as liability questions around a major wildfire that swept through portions of California in November 2018 are threatening the financial health of a large energy utility, according to Regulatory Research Associates, an offering of S&P Global Market Intelligence. A few insurance companies have filed negligence lawsuits against that utility, Pacific Gas and Electric Co., and its parent PG&E Corp.

The study found that for the insurers' aggregated equity holdings, 6.8% of power assets, 31.8% of coal mines, and 25.6% of oil and gas production sites could be exposed to wildfire risk in 2020, while 13.8% of power plants and 6.8% of oil and gas production sites may be exposed to flooding risk that year. For bonds in the insurers' portfolios, 8% of power assets, 34.1% of coal mines and 22.5% of oil and gas production sites could be exposed to wildfire risk in 2020, while 16.7% of power plants and 4.5% of oil and gas production sites could face flooding risks.

Flooding can damage transmission substations, erode the ground around underground pipelines and exacerbate the potential for trees to fall on power lines, among other things.

The study also found that water scarcity poses the biggest threat to power plants in the insurers' portfolios. Coal-, gas- and oil-fired as well as nuclear power plants, also known as thermal generation, rely on water for cooling or for producing steam. Droughts exacerbated by global warming and climate change can create new challenges for those operations.

For the insurers' stock market holdings in utilities with power plants, the analysis found that 10.2% of thermal plants could be exposed to extremely high and arid water stress conditions by 2020. For bonds, 15.6% of thermal power plants could face water stress conditions by 2020.