By Sean Hanley, Pickering Energy Partners
The views expressed by the author are their own and do not represent the views of Energy Workforce & Technology Council.
The insurance industry has been extremely active over the past few years with both their investment (or divestment) and their perspective on fossil fuels. As in most circles, there are varying viewpoints and approaches to their insurance business operations as well as how they are allocating their investment capital. First, let’s address the geopolitical views that underlie their investment decision-making process. A United Nations led Net-Zero Insurance Alliance was created in 2021 and disbanded in 2023 after five of its eight found members left. The group saw seven departures alone in 2023, including German-based Allianz and France-based reinsurer SCOR.[1]
From an operational perspective, Allstate and State Farm have both stopped selling new home insurance in California. State Farm, along with Berkshire Hathaway (including Geico and General Reinsurance), have also raised premium rates, which directly impacts what their clients pay. That said, State Farm and Berkshire have been oversized buyers of fossil fuel companies, so much so that it drove overall investment by insurance companies to 4.4% of their overall portfolios from 3.8% in 2014, according to an analysis by the Wall Street Journal of data from the National Association of Insurance Commissioners, a group of state regulators. Overall, property-and-casualty insurers reduced the proportion of their portfolios to a median of 1.8% last year. This was down from 3.4% in 2014. From a total allocation perspective, the value of fossil fuel holdings by property-and-casualty (P&C) companies rose to $84.6B in 2023 from $57B in 2014.[2] This was primarily driven by Berkshire increasing its holdings in fossil fuel companies to $39.9B.
Insurance companies’ core business is predicated upon forecasting and subsequently pricing the risks of storms, wildfires, hurricanes, etc., into their underwriting models and passing those costs onto their customers. They also invest those premiums into stocks and bonds, which help finance fossil fuel companies’ growth projects and overall capital expenditures focused on generating free cash flow.
Insurers should be focused on responsibly investing in companies that practice strong capital discipline, exploit sustainable competitive advantages, have strong management teams overseeing future performance, and returning excess returns to their shareholders. The reality is that this should be done without bias and should exercise a pragmatic approach, realizing that fossil fuels promote energy independence, security, affordability, and reliability. There is simply no alternative to fossil fuels’ baseload capabilities outside of nuclear energy. Power grids are slowly moving towards natural gas away from coal-burning operations to reduce CO₂ emissions, but methane remains a concern. Companies such as Occidental have invested in direct air capture technology while still prioritizing core operations and cash flow generation. British Petroleum, on the other hand, has tried to be a first mover in the energy “transition” towards renewables and has generated negative returns as a result.
What does this all mean for energy companies? Our conversations with large P&C insurance companies like Chubb tell us that they will continue to push for Methane mitigation plans and data supporting those efforts and aligning with frameworks such as OGMP 2.0 (The Oil & Gas Methane Partnership 2.0). Thus, it is imperative that corporations address the risk around methane emissions at an operational level. Pneumatics, excessive flaring, and the constant evaluation of methane monitoring technologies should be examined as close to daily as possible. Boards need to focus on the impact of the Waste Emission Charge (WEC) and other regulatory penalties for egregious emitters. We have yet to see these methane requirements take hold at smaller P&C insurance companies, but it is always best to act now to stay out in front of potential financial sanctions, which will also damage the intangible brand value of the offending organization.
If you have any questions around filling in operational gaps and how to properly allocate resources to execute on a methane mitigation plan, or questions around methane monitoring technologies, please do not hesitate to contact the team at Pickering Energy Partners. We aim to be an extension of your team and have in-house expertise to help address those vulnerabilities!
Sources:
- https://www.esgdive.com/news/net-zero-insurance-alliance-disbands-rebrands-forum-insurance-transition-net-zero
- https://www.wsj.com/us-news/climate-environment/the-two-big-insurers-still-betting-on-fossil-fuels-fa31bb15
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Sean Hanley Director – Consulting & Advocacy
