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Lloyd’s of London should take action on coal risk

ClientEarth has written to Lloyd’s of London to ask it to take action on risky coal business.

In a recent welcome move, the insurance institution announced that it is preparing to exclude coal from its investment policy but it could go further.

ClientEarth wrote to Lloyds of London and signed a separate letter by the coalition group Unfriend Coal, urging action.

Lloyd’s of London doesn’t insure risks directly but oversees a market place for specialty insurers underwriting risks around the world. In a letter to Lloyd’s CEO Inga Beale, ClientEarth pointed out that Lloyd’s proposed investment policy change will affect just 2.5% of the capital supporting the business insured at Lloyd’s.

The letter warns that, without further action, a very large part of this capital “remains potentially exposed to coal related risks, such as stranded asset risk, through both the underwriting and investment in coal business”.

The ClientEarth letter recommends that Lloyd’s address the stranded asset risks of the activities on its market by amending the rules which all insurers who are members of the Lloyd’s market must comply with (the Minimum Standards). In line with the recommendations of Lloyd’s 2017 report on stranded assets, ClientEarth proposes that Lloyd’s:

  • Ensure that insurers operating in its market stress test coal and coal-related operations to identify stranded asset risks;
  • Require the use of current and peer reviewed climate science in the evaluation of stranded asset risks;
  • Identify the recommendations of the Task Force on Climate Related Financial Disclosures as best industry practice in regards to how its Minimum Standards are applied.

“Coal operations have the potential to create outsized risks, consuming extensive amounts of capital to satisfy property losses, business losses and litigation exposures”, said ClientEarth lawyer Alice Garton, “Lloyd’s has an opportunity to champion and consolidate the insurance industry’s view that underwriting and investing in coal is both risky and unprofitable.”

In a separate letter, six environmental organisations engaged in the Unfriend Coal campaign – ClientEarth, Greenpeace, InfluenceMap, ShareAction, the Sunrise Project and 350.org – encouraged CEO Inga Beale to adopt best industry practices in the development of Lloyd’s coal exclusion policy. Specifically, the organisations proposed, Lloyd’s should:

• Apply its exclusion policy not only to pure coal players, which make up a small portion of the global coal market, but to all companies which derive at least 30% of their business from coal;
• Extend its policy to cover extreme fossil fuels such as tar sands and Arctic oil drilling;
• Require the member companies of the Lloyd’s market to set aside more capital for any underwriting exposure to the coal sector.

By increasing the capital requirements for member companies offering insurance to the coal sector – a practice it has also applied for the exposure to cyber risks – Lloyd’s can appropriately account for the high risks of coal and encourage the transition from coal to clean energy sources. By doing so Lloyd’s can also avoid that the specialty insurers using its market place fill the gap left by other insurers which are currently leaving the coal sector.

“Lloyd’s move away from coal is highly symbolic for the demise of dirty fossil fuels”, said Peter Bosshard, the coordinator of the Unfriend Coal campaign, “by adopting best industry practices in its coal exclusion policy, Lloyd’s can confirm its reputation as an environmentally responsible actor and avoid that its member companies undermine the shift of other insurers out of the coal sector.”

Alice Garton is an Australian qualified lawyer.

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