Long-term investors in the fossil fuel industry could face a “huge hit” in the future, the Bank of England has warned. The central bank noted that assets in the sector could become ‘stranded’ as the world moves towards low-carbon alternative.
Last week the Bank of England acknowledged that climate change could have an impact on financial markets in a research agenda. The paper also noted that the move to a low-carbon economy could leave fossil fuel assets ‘stranded’.
Now the bank has warned that long-term investors could be affected by environmental and climate change policy that limits the use of fossil fuels in a speech aimed at the insurance sector.
Speaking at the Economist’s Insurance Summit in London, Paul Fisher, deputy head of the bank’s prudential regulation authority, said, “Climate change impacts insurers on both sides of their balance sheets. Insurers may be impacted but increased claims experience –particularly given the London Market’s prominence in areas like catastrophe risk. But it appears that the asset side may also give rise to unexpected risks.”
He explained that extreme weather events, from storms and floods to hotter summers, are becoming more frequent. While this trend could present an opportunity for insurers to underwrite new products there are risks in concentrated exposures to “large catastrophe losses”, inadequate risk management and potential mis-pricing that could undermine the sustainability of businesses, Fisher said.
“But insurers, as long-term investors, are also exposed to changes in public policy as this affects the investment side. One live risk right now is of insurers investing in assets that could be left ‘stranded’ by policy changed which limit the use of fossil fuel,” Fisher continued.
“As the world increasingly limits carbon emissions, and move to alternative energy sources, investment in fossil fuel related technologies – a growing financial market in recent decades – may take a huge hit.”
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