A stress test is a way of assessing man’s impact on climate. What will happen if the global temperature increases by 1.5° C. ? By 2° C. ? More ? An increased average global temperature will hasten the melting of the polar ice caps and mountain glaciers, leading to a rise in sea levels that will inundate low-lying coastal areas and a number of South Pacific islands. No responsible investor, including the Canada Pension Plan Investment Board (CPPIB), should be investing in any commodity that, when used, will contribute to global temperature increase.

In May 2018 the California Department of Insurance (CDI) has announced that it plans to conduct a climate-related financial risk stress test and analysis of reinsurance companies’ investments in fossil fuels, which it claims will be the most comprehensive test of its kind for the insurance sector, and the first in the U.S.

The CDI has engaged 2° Investing Initiative, and established partner of European financial regulators on the topic, to conduct the analysis for companies in California’s insurance market, which account for around $100 million in annual premiums. The analysis covers re/insurers with over $500 billion in fossil fuel-related securities issued by power and energy companies, $10.5 billion of which consists of investments in thermal coal enterprises.

California Insurance Commissioner Dave Jones said: “The climate-related financial risk to insurers’ investments in thermal coal, other fossil fuels and fossil fuel enterprises should not be ignored.”

“As a financial regulator, I want insurers to consider climate-related financial risks, including risks to their investments.. In order to make sure they are considering these risks, we have undertaken an analysis of the climate-related risk to insurers’ investments.”

2° Investing’s forward-looking scenario analysis has determined that thermal coal presents long-term financial risks for investors, despite any short-term fluctuations in market price and policy signals.

Cynthia McHale, Director of Insurance at the sustainability nonprofit organisation Ceres, also commented on the CDI’s plans: “Ceres applauds the leadership and foresight of CDI’s Commissioner Dave Jones, and encourages all insurers to incorporate 2° scenario analysis into their business strategy.”

“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 insurer reports will also be sent out to all participating companies which will explain how investment plans align with different climate scenarios, where the individual insurer ranks among its peers, and which securities are driving the climate risk exposure of their investment portfolios.

Butch Bacani of the United Nations leads the PSI, the largest collaborative initiative between the UN and the insurance industry. He said: “This pioneering work by CDI on scenario analysis to assess transition risk in insurers’ investments is yet another testament to California’s commitment to promote climate risk transparency and sustainable insurance markets, in line with the aims of the Financial Stability Board’s climate risk disclosure recommendations, The Paris Agreement on Climate Change, and the Global Climate Action Summit in California this year. This is leadership in action.”