Last week, California Insurance Commissioner Dave Jones fired back against a group of 12 oil and coal state that have threatened legal action over the Climate Risk Carbon Initiative.
The threats of legal action began in June 2017, when Oklahoma Attorney General Mike Hunter, the successor to the current EPA administrator Scott Pruitt, sent a letter threatening to sue Commissioner Jones over his Climate Risk Carbon Initiative (CRCI). In that letter, Hunter, the eleven co-signing AGs, and Kentucky Governor Matt Bevin accuse Commissioner Jones of publicly shaming insurance companies, targeting energy companies with a significant presence in their states, and violating the Commerce Clause of the US Constitution. The letter concludes with the authors threatening that if “…you continue your Climate Risk Carbon Initiative, legal action against you is a certainty.”
So what is the Climate Risk Carbon Initiative?
Insurance companies in California earn revenue from their underwriting activities that include the premiums collected from policy holders (estimated at $289 billion annually) and the returns on investments of those premiums. To maintain financial stability, Commissioner Jones is charged with ensuring the insurance companies are financially sound and are not vulnerable to the kind of volatility that would have a detrimental impact an insurance company’s liquidity and in turn ability to pay policyholder claims. Commissioner Jones launched the Climate Risk Carbon Initiative in January 2016 to evaluate the degree to which the investments of California insurers might be impacted by the financial risks of climate change. The initiative includes two parts. First, all insurance companies doing business in California are asked to voluntarily divest from thermal coal. Second, Commissioner Jones asked insurers doing business in California with over $100 million in annual premiums to disclose their investments in coal, oil, and natural gas companies. By using data calls and surveys, Commissioner Jones has directed the California Department of Insurance to collect responses from insurance companies that conduct business in the state and to maintain a searchable, publicly available database that details which insurers doing business in California are invested in oil, gas and coal and in utilities that rely on oil, gas and coal.
How does the Climate Risk Carbon Initiative Address Stranded Asset Risk?
When the financial sector speaks of stranded assets, it refers to how accountants designate assets that have suffered from some unexpected drop in the value that can ultimately shorten the useful life of the asset and potentially become a liability to the company. In the climate context, there are concerns that rapid changes to global markets – for example from improved technology spurring greater demand for Electric Vehicles or new regulations like country commitments to reduce carbon emissions under the Paris Agreement – could significantly decrease the value of companies and in turn lower the stock price. For example, prior to launching the Climate Risk Carbon initiative, the US coal industry lost 76% of its value in the five years between 2011 and 2015. The sudden loss in value raised questions about whether insurance companies’ investment portfolios were sufficiently diversified or if those portfolios were too heavily weighted with fossil fuel investments to maintain the liquidity needed to protect policy holders and ensure financial stability for the insurance market. Under the Insurance Code, the California Commissioner has a duty to ensure that all insurance companies doing business in California are operating in a prudent financial manner. And with the California Department of Insurance collecting $289 billion a year in premiums with approximately $7 trillion in investments, the Commissioner has a substantial responsibility to regulate the world’s sixth largest insurance market. If an insurance company’s investments are vulnerable to abrupt fluctuations in asset values, particularly coal assets, then this could adversely affect the reserves available to pay claims and in turn lead to financial instability in California’s insurance market. As the impacts of climate change accelerate and insurance payouts increase, the need to protect against such instability will only grow in importance.
According to its website, the California Department of Insurance is the first to provide such a comprehensive level of insight into the fossil fuel investments of insurers. Commissioner Jones is the first financial regulator in the United States to ask for divestment from thermal coal due to the risk that it is likely to or has already become a stranded asset. The Commissioner is also the first insurance commissioner in the United States to require insurers to disclose publicly their investments in oil, gas, and coal and utilities that rely on these energy sources. Protecting disclosure regimes is paramount to greater transparency and stable financial markets.
Legal and Legislative Attacks on Commissioner Jones Undermines Financial Stability in California’s Insurance Markets
The Oklahoma AG’s letter threatens Commissioner Jones with legal action if he continues to operate the Climate Risk Carbon Initiative because, the OK AG argues, one in four Oklahomans work in the energy industry and disclosure will harm families, businesses, and insurance carriers in Oklahoma. The letter further argues that the information the California Commissioner seeks is “…largely immaterial for a well-functioning insurance market.” But calling climate risk, specifically carbon transition risk exposure, immaterial is contrary to the findings of credit rating agencies like Moody’s, inconsistent with statements from the Securities and Exchange Commission, and contrary to public statements from some of the world’s most influential investors and asset managers that acknowledge the material financials risks that climate change poses. As CIEL and Mercer Investments documented in our Trillion Dollar Transformation reports, failure to acknowledge the financial risks that climate change presents may be detrimental to institutional investors, like public pension funds, and may trigger liability for their fiduciaries for failing to act with prudence.
In addition to threats of legal action, there are currently legislative efforts to limit Commissioner Jones’ discretion to regulate the insurance markets. At the same time that the Oklahoma AG’s letter threatens legal action over the Climate Risk Carbon Initiative, Senate Bill 488, now before the appropriations committee, was amended with language to limit Commissioner Jones’ ability to issue the data calls for the disclosures that will populate the insurers’ investment database. Opposing SB 488 in its amended form is a critical step in defending Commissioner Jones’ regulatory authority to enhance climate risk disclosure and enhance the transparency of insurers conducting business in the state of California. Opposing Senate Bill 488 also pushes back against the corporate interests that have been emboldened by an administration intent on reversing environmental protections and climate action.
This effort to legally restrict the Commissioner’s power to regulate is both persistent and insidious. Similar language had been added to two earlier bills – Assembly Bill 566 and Assembly Bill 601 – although neither made it through the Assembly. Senate Bill 488 was originally intended to “add veteran and lesbian, gay, bisexual, and transgender (LGBT) business enterprises to the entities for which” reporting by insurance companies would be required. Now, those who would stymie action on climate disclosure have inserted harmful language into an otherwise admirable bill. Not only does this effort seek to roll back progress on climate action to appease corporate interests, but it tries to do so by attaching a poison pill to a bill otherwise worth passing, an effort likely intended to sow divisions among the progressive community.
Commissioner Jones responds to Legal Attacks: Bring It On
In response to threats of legal action, Commissioner Jones challenged the group to “bring it on,” stating that, “I am not deterred by threats of lawsuits from [those] who find it politically popular to deny the reality of climate change.” The sentiment was similarly captured in a letter drafted earlier this year to the Task Force on Climate-Related Financial Disclosures (TFCD). “We are not alone in our concern about the financial risk to insurance company investments associated with climate change and climate risk. The Financial Stability Board of the G20, the Prudential Regulatory Authority of the Bank of England, insurance regulators across the world, institutional and private investors, and many others, have called for disclosure of climate related risks.”
Moving closer to achieving the ambitions of the Paris Agreement and transitioning away from fossil fuels to a low carbon economy in the US will require supporting the most progressive states and their regulators against attacks by fossil fuel interests. Commissioner Jones’ Climate Risk Carbon Initiative must continue because the data call and survey process fosters transparency that supports financial stability. This kind of regulatory oversight is particularly needed now when private and institutional investors and global regulators acknowledge the vulnerability of fossil fuel assets and industries to stranded asset risk.
By Lisa Anne Hamilton, Director of the Climate & Energy Program
Originally posted August 7, 2017