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ClientEarth Communications

6th August 2018

Rule of law
Climate finance

Insurance firms could face fines over climate reporting failure

Three insurance firms, including Admiral, could be facing fines after ClientEarth reported them to the Financial Conduct Authority for failure to disclose climate risks in their annual reports.

The environmental law organisation has sent detailed legal letters to the regulator about Admiral, Lancashire Holdings Limited and Phoenix Group Holdings.

Climate change is a principal risk or uncertainty affecting these companies, and as a result they are legally obliged to report this in their annual reports.

However, there is no mention of the risks posed by climate change in any of the companies’ annual reports. The FCA could fine or publicly censure the insurers as a result of the complaints. The companies could also be made to publish information which rectifies the omissions in their annual reports.

ClientEarth insurance lawyer Stephanie Morton said: “Given the myriad of climate change-related risks these companies are exposed to, we were surprised to find that they were not communicating this to investors.

“We think the law is quite clear on this and by omitting financially material climate risks from their annual reports, these companies are not giving the full picture. Without this information, how can investors make a fully-formed investment decision?”

Insurance companies are exposed to four main types of risk.

There are physical risks from climate change, which are likely to result in more claims and a reduction in the value of insurers’ assets.

The transition risks caused by changing consumer preferences, technological advances, and new governmental policy could also reduce the value of their investment portfolios. It may also negatively affect demand for insurance from carbon-intensive sectors.

Insurers also face liability risks. If losses are suffered as a result of climate risks, insurance companies could find themselves on the hook for third-party liability claims against their corporate customers.

Finally, there is a reputational risk for the insurance sector as the role it plays in underwriting and financing the fossil fuel sector comes under increased public scrutiny.

The insurance sector is particularly vulnerable to these climate risks, as they affect both sides of their balance sheets.

The FCA has recently responded to the Environmental Audit Committee’s Green Finance report, listing proactive steps it was taking with regard to climate change-related disclosures.

As part of this, the FCA said it will “highlight to issuers the need to make adequate disclosures regarding materially important information, including information that allows investors to understand how ESG matters affect the valuation of a listed company’s securities and how these matters are managed by the company.”

Morton added: “The FCA has moved swiftly this year in understanding the risks that climate change presents to the economy. This is an opportunity for the FCA to send a strong market signal that climate disclosures are essential for enabling investors to assess climate-related financial risks, and we look forward to a speedy and robust response.”