Ortec Finance report reveals European insurers’ investment returns expected hit from climate change

Written by Adam Cadle

04/12/2024

Transition risks because of a disorderly transition to net-zero could affect European insurance company investment returns by up to 13% in the short term, while longer term physical risks resulting from a lack of action could result in declines of up to 23% by 2050, Ortec Finance has warned.

In its inaugural European insurance company climate risk report, Ortec Finance applied seven possible climate scenarios, which include the impact of climate tipping points in its high warming scenarios. It found that transition risks are likely to be the dominant climate risk from 2025 to 2030.

“In the event of a disruptive transition, equity investments would be the most impacted, potentially suffering a 25% drop in returns, followed by alternative and real estate investments, while fixed income investments will be more resilient,” said Doruk Onal, climate risk specialist at Ortec Finance.

In the longer term, it is anticipated that rising carbon emissions in the absence of further decarbonisation efforts will increase levels of physical risk, leading to severe financial impacts by the mid-2030s. In a worst-case scenario, the average European insurer’s investment return could decline by 5% within the decade, quadrupling to 21% within six years thereafter, and deteriorating further to 23% by 2050.

“Severe physical risks could slash real estate and equity portfolio returns by more than 50% by 2050, as increasing frequency of extreme weather events affecting agriculture, labour and industrial productivity, have a profound impact on economies and assets,” Onal added. “In this scenario, both real estate and equities, which together comprise almost 30% of European insurers’ portfolios, could yield less than half of expected returns.”

While short-term cumulative returns for an average European insurer due to low-carbon policies and decarbonisation activities could decline by 13%, Ortec Finance added, this reduction is less than half of the potential decline of up to 23% in a scenario where active decarbonisation does not occur in the near future.

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