Insurers face 'huge' fossil fuel losses warns Bank of England

Paul Fisher said huge volumes of fossil fuel reserves could be left 'stranded' if strong targets were agreed

Huge volumes of fossil fuel reserves could be left “stranded” if strong targets were agreed to limit the carbon dioxide emissions that cause climate change. (PA)

Insurance companies could suffer a “huge hit” to their investment portfolios if meaningful action is taken to combat climate change, the Bank of England warned yesterday.

Ahead of a crucial UN climate change summit in December, Paul Fisher said huge volumes of fossil fuel reserves could be left “stranded” if strong targets were agreed to limit the carbon dioxide emissions that cause climate change.

Mr Fisher, the deputy head of the Bank’s Prudential Regulation Authority (PRA), told an insurance industry conference this was because a huge portion of oil, gas and coal companies’ reserves would need to stay in the ground, dramatically reducing their share prices and, in turn, hitting investors such as insurance firms.

“As the world increasingly limits carbon emissions, and moves to alternative energy sources, investments in fossil fuels – a growing financial market in recent decades – may take a huge hit,” Mr Fisher said. “One live risk right now is of insurers investing in assets that could be left stranded by policy changes which limit the use of fossil fuels.”

At the UN meeting in December world leaders have pledged to agree carbon emissions cuts that are big enough to limit global warming to 2C, the level beyond which its consequences would become increasingly devastating.

Although many experts doubt they will succeed in action quite so drastic, most expect significant cuts to be agreed at the Paris meeting that would require huge quantities of fossil fuels to remain unburnt. And if they do agree to keep warming within 2C, up to 80 per cent of the world’s coal, half of its gas and a third of its oil will need to stay in the ground, research shows.

Mr Fisher said he was still some way from considering extra capital charges on insurers to cover such risks from fossil fuel investments. However, he said it was clearly a big issue that had yet to “permeate” the insurance sector.

The fossil fuel companies also show little sign of slowing their breakneck investment, spending a combined $670bn (£436bn) in 2013 exploring for new reserves.

Insurance companies could also be hurt by claims from fossil fuel companies relating to declines in the value of their reserves, Mr Fisher cautioned. “Climate change impacts insurers on both sides of their balance sheets,” he said.

The Bank is due to report to the Government later this year on the financial risk posed by the so-called carbon bubble. “We are seeking to understand how these changes [in climate policy goals] may impact upon the PRA’s objectives and how that could shape our role,” Mr Fisher said.