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Insurers reduce carbon footprint by scaling down equity investments in specific sectors

DNBulletin

Published: 10 March 2020

Windmolens

Dutch insurance groups have been pursuing more sustainable investment strategies in recent years. These findings follow from research conducted by DNB. They have actively reduced their investments in raw materials extraction, a relatively high-polluting sector.

Insurers’ role in promoting sustainability

Meeting the goals of the Paris climate agreement will require a transition to a economy along with major investments. Insurers can make a serious contribution to this transition thanks to their vast investment portfolios. Dutch insurers alone have nearly EUR 460 billion in assets on their balance sheets, which is around 55% of Dutch. They had invested around EUR 32 billion of these assets in shares at the start of 2019. By investing more in renewables and less in carbon-intensive sectors, insurers can make a positive contribution toward achieving a economy. Earlier research by DNB had already indicated that Dutch insurers tend to follow a relatively sustainable investment strategy. The figures show that their carbon footprint shrank strongly in the period from 2012 to 2015, and that it has remained relatively stable since then. 

Small proportion of investments responsible for big chunk of carbon footprint

In 2012, a mere 24% of Dutch insurers’ total equity investments were good for half of the average carbon footprint of their portfolios (see Figure 1). Investments in gas and electricity, raw materials extraction and the petrochemical industry are particularly polluting, making up a disproportionate part of the carbon footprint. Figures of a more recent date (2019) show that insurers have reduced their equity investments in these three heavily polluting sectors: from 24% in 2012 to 17% seven years later. The most pronounced reduction has been in investments in raw materials extraction. Shares in raw materials extraction made up just 8% of equity portfolios in the first quarter of 2019, 15% down on seven years earlier.

Figure 1: Investment mix and carbon footprint by sector

[Info button: This figure shows both the equity portfolio and the composition of the carbon footprint of Dutch insurers for the first quarter of 2012 and the first quarter of 2019.]

Fig 1 Investment mix and carbon footprint by sector

Source: DNB

Active reduction of investments in raw materials extraction

To verify whether the trend toward sustainability in insurers’ investment portfolios is not driven by price movements for example, actual selling or purchase transactions should be analysed separately from price changes and other movements (e.g. exchange rate changes).

Figure 2: Movements in equity investments by sector (2012-2019)

[Info button: This figure shows both net purchases or sales and price changes or other movements in shares for 2012-2019 by sector as a percentage of each aggregate equity investments in those sectors in 2012Q1.]

Fig 2 Movements in equity investments by sector (2012-2019)

Source: DNB

Figure 2 shows both aggregate net purchases for 2012-2019 and aggregate price changes or other movements as a percentage of aggregate equity investments in those sectors in 2012Q1. This shows, first and foremost, that insurers have been selling shares over the past seven years. Also, it shows that substantial price increases in a given sector typically resulted in high net sales in the same sector, which is indicative of portfolio rebalancing. This means that insurers sold shares whose prices had gone up, while buying shares whose prices had dropped, in line with the adage of "buy low, sell high". This rebalancing strategy keeps the composition of an equity portfolio constant.  Another way to achieve this is by selling more shares as price increases exceed the average price increase for the portfolio. This pattern is not seen in the raw materials extraction sector, however. Although share prices in this sector have decreased – unlike all other sectors – insurers refrained from buying them. In fact, by selling these shares, they have actively scaled down their positions in raw materials extraction. This reduction has made an important contribution to making insurers’ equity portfolios more sustainable.

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