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Stranded Assets: the Transition to a Low Carbon Economy Overview for the Insurance Industry

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Emerging Risk Report 2017 Innovation Series Society and Security Stranded Assets: the transition to a low carbon economy Overview for the insurance industry 02 About Lloyd’s Acknowledgements Lloyd's is the world's specialist insurance and Lloyd’s of London and the Oxford Smith School would reinsurance market. Under our globally trusted name, like to thank the attendees at the workshop on stranded we act as the market's custodian. Backed by diverse assets that Lloyd’s hosted, the experts who were global capital and excellent financial ratings, Lloyd's interviewed as part of the process, and an independent works with a global network to grow the insured world – group of peer reviewers from the Grantham Institute at building resilience of local communities and Imperial College London. strengthening global economic growth. With expertise earned over centuries, Lloyd's is the Lloyd’s of London Disclaimer foundation of the insurance industry and the future of it. This report has been co-produced by Lloyd's for general Led by expert underwriters and brokers who cover more information purposes only. While care has been taken than 200 territories, the Lloyd’s market develops the in gathering the data and preparing the report Lloyd's essential, complex and critical insurance needed to does not make any representations or warranties as to underwrite human progress. its accuracy or completeness and expressly excludes to the maximum extent permitted by law all those that might otherwise be implied. Key Contacts Trevor Maynard Lloyd's accepts no responsibility or liability for any loss Head of Innovation or damage of any nature occasioned to any person as a [email protected] result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression Anna Bordon of opinion or belief contained in this report. This report Executive, Emerging Risks and Research does not constitute advice of any kind. [email protected] © Lloyd’s 2017 For general enquiries about this report and Lloyd’s All rights reserved work on emerging risks, please contact [email protected] University of Oxford Disclaimer The Chancellor, Masters, and Scholars of the University About the authors of Oxford make no representations and provide no Lloyd’s of London commissioned the Sustainable warranties in relation to any aspect of this publication, Finance Programme at the Smith School of Enterprise including regarding the advisability of investing in any and the Environment at the University of Oxford (the particular company or investment fund or other vehicle. Oxford Smith School) to help produce this emerging risk While we have obtained information believed to be report. Lloyd’s of London, who had editorial control, reliable, neither the University, nor any of its employees, edited the text provided by the Oxford Smith School. students, or appointees, shall be liable for any claims or losses of any nature in connection with information Members of the team at the Oxford Smith School contained in this document, including but not limited to, involved in supporting this project are listed below: lost profits or punitive or consequential damages. Ben Caldecott © Lloyd’s 2017 Director, Sustainable Finance Programme, Oxford All rights reserved Smith School Date of publication: February 2017 Gerard Dericks Postdoctoral Research Associate, Sustainable Finance Programme, Oxford Smith School Alexander Pfeiffer Research Assistant, Sustainable Finance Programme, Oxford Smith School Pablo Astudillo Research Assistant, Sustainable Finance Programme, Oxford Smith School Stranded Assets – The transition to a low carbon economy: overview for the insurance industry Contents 03 Contents Contents ................................................................................................................................................................................ 3 Executive summary ............................................................................................................................................................... 4 1. Risk, trends and stranded assets ..................................................................................................................................... 6 1.1 Physical risks ............................................................................................................................................................... 8 1.2 Societal risks ............................................................................................................................................................... 9 2. Real and potential impacts of stranded assets ............................................................................................................... 10 2.1 Selected scenarios analysis ...................................................................................................................................... 11 2.1.1 Upstream energy .................................................................................................................................................... 12 2.1.2 Downstream energy ............................................................................................................................................... 16 2.1.3 Commercial property .............................................................................................................................................. 23 2.1.4 Residential property ............................................................................................................................................... 24 2.1.5 Shipping ................................................................................................................................................................. 26 3. Examples of individual and collective investor responses .............................................................................................. 28 References .......................................................................................................................................................................... 29 Stranded Assets – The transition to a low carbon economy: overview for the insurance industry Executive summary 04 Executive summary Background Report overview Stranded assets are defined as assets that have suffered The report, part of Lloyd’s emerging risk report series, from unanticipated or premature write-downs, looks at actual and potential examples of how stranded devaluation or conversion to liabilities. In recent years, assets caused by societal and technological responses to the issue of stranded assets caused by environmental climate change could affect assets and liabilities in the factors, such as climate change and society’s attitudes insurance and reinsurance sector. The study aims to towards it, has become increasingly high profile. increase the understanding and awareness of these issues in the industry. To do so, it analyses the following While asset-stranding is a natural feature of any market eight asset-stranding scenarios in various business economy, it is more significant when related to sectors: environmental factors because of the scale of stranding that could take place. Changes to the physical Upstream energy assets: oil and coal reserves environment driven by climate change, and society’s become stranded due to international, top-down response to these changes, could potentially strand carbon budget constraints (i.e. “unburnable carbon”) entire regions and global industries within a short Upstream energy liabilities: third-party liability timeframe, leading to direct and indirect impacts on claims against companies (and their D&Os) investment strategies and liabilities. responsible for climate change Asset stranding is already taking place in some Downstream energy assets: premature closure of industries. For example, the increase in renewable coal power stations due to concerns about climate energy generation, worsening air pollution, and change and the fossil-fuel divestment campaign decreasing water availability caused by climate change, Downstream energy liabilities: an increase in coupled with widespread social pressure to reduce political risk events due to government energy China’s demand for thermal coal, have negatively policies induced by climate-change concerns impacted coal-mining assets in Australia1. Downstream energy assets: residential solar PV Stranded assets became particularly relevant to insurers and electricity storage (in part connected to electric when Mark Carney, the Governor of the Bank of England vehicles) impairs centralised electricity generation and head of the PRA, the insurance regulator, spoke market about the topic at the 2015 Lloyd’s City Dinner, and Residential property assets: mandatory energy stressed how important it was that the insurance industry efficiency improvements reduce the value of the least takes account of stranded asset risk when developing its efficient housing stock and increase the value of the investment strategies and considering future liabilities. most efficient housing stock “The UK insurance sector manages almost £2 trillion in Commercial property liabilities: property industry assets to match liabilities that often span decades,” professionals and governments are sued for Carney said. “While a given physical manifestation of negligence for not disclosing, reporting or for being climate change – a flood or storm – may not directly misleading on
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