Issues & Answers Special Advertising Section:
 September 2022

Issues & Answers: A Climate of Change

As the momentum behind decarbonization and net-zero objectives builds around the world, insurers are increasingly trying to understand and address the investment implications of climate change on investment policy and asset allocation decisions. The need for insurers to take action on climate science just keeps building, says Tim Antonelli, who leads Wellington Management’s global insurance portfolio solutions. Following are excerpts from an interview with Tim.

Tim Antonelli, CFA, FRM, SCR
Insurance Portfolio Strategist
Wellington Management

“Don’t just use climate as a risk-off exercise. You should use it as a way to capture alpha sources as well.”

What is the lay of the land as it relates to insurers’ progress on integrating and assessing climate change?

At the highest level, real best practices have emerged from who I think are the furthest along on their journey, generally European insurers. Some of the trademarks of that group include a consistent, top-down organizational philosophy, a broken-down silo construction across all functions at the firm. We also see a shift from just exclusionary-based investing to trying to maintain the broadest investable asset universe, and understanding that things such as engagement can become a very valuable tool in this journey.

How can insurers evolve their investing approach to tackle these issues?

First and foremost, you should ensure that the investment professionals are in line with what your corporate philosophy is. The second thing is establish your baseline exposure. To do that means you should have a full assessment of your exposures, both from the transition risk perspective. Then, third, you should keep your opportunity set for investing as broad as possible. Then, finally, lean into thematic opportunities. Don’t just use climate to avoid risk.

How is Wellington helping insurance clients on this journey to better understand and incorporate climate impact?

Five years ago, we started partnering with the Woodwell Climate Research Center, who is one of the foremost physical risk climate science centers in the world. We’ve used their research to model heat, wildfire, flooding, hurricanes, etc., to understand what the long-term structural changes could be to our investable asset universe for insurers that are going to be affected by the inevitable climate risk that’s likely to occur. At the beginning of 2022, we partnered with the Joint Program on the Science and Policy of Global Change at the Massachusetts Institute of Technology to work on transition risk specifically.
What it will allow us to do is explore a whole host of policy projections as it relates to implementing things such as a carbon tax or shifting sectoral bases as economies move toward a more green, forward-looking state, and will allow us to consider and understand some of those risks, not only through an engagement lens with the portfolio companies we have, but also through some stress testing as well.
At the end of last year, we also moved our capital market assumption process to be wholly-ingrained from a climate-aware fashion, meaning we have transition risks and physical risks embedded in all of our asset class returns for the next 10 years