RI Interview: California Insurance Commissioner Dave Jones on his Climate Risk Carbon Initiative

The insurance regulator who is asking for fossil fuel disclosure

“It is rather hysterical and overwrought,” says California Insurance Commissioner Dave Jones in reaction to a letter from 13 US fossil fuel states threatening legal action as a result of his new Climate Risk Carbon Initiative.

“Unfortunately in the United States there continues to be quite a few political leaders who deny that climate change is occurring or deny that the principal cause of climate change is man-made emissions, so it’s become a very politicised issue.”

Jones is speaking to RI at the 10th Annual International Association of Insurance Supervisors (IAIS) Global Seminar in the week of the publication of the final report from the Bloomberg-led Taskforce on Climate-Related Financial Disclosures (TCFD). He is there in his role as chair of the new Sustainable Insurance Forum, where insurance regulators globally share best practice and consider approaches to sustainability. Its second meeting focuses on the TCFD final report.

His Climate Risk Carbon Initiative closely reflects the TCFD in attempting to shine a light on climate-related risks, and builds on work from the United States National Association of Insurance Commissioners (NAIC), the standard setting body for insurance regulators.

He explains: “In 2009 NAIC adopted a climate risk disclosure survey with questions on whether insurers are thinking about addressing climate change and climate risk in their business operations, their underwriting and their reserving. It’s a qualitative survey not quantitative, but it proves some very useful information on the extent to which insurance companies are thinking about addressing climate change and climate risks.”

Alongside California, the states of New York, Connecticut, Minnesota, Washington and New Mexico have been administering the survey annually since 2009. “The insurers are required to answer this survey and we make the results public,” he says. “The survey is directed to insurance companies who have in excess of a $100m in premium annually so between the five states we are reaching 77% of the market.”

Through the surveys the California Department of Insurance has observed that one area of principal concern is the extent to which insurance companies are recognising and taking steps to address what Financial Stability Board chair Mark Carney identified as transition risk, says Jones.

“We’ve seen increasingly local, state, national and international measures to reduce reliance on carbon as an energy source. We’ve seen as well significant decrease in the price of renewable energy sources versus carbon. As a result of this market development the demand for renewables is increasing and the demand for some carbon based fuels is not increasing as much and in some cases declining. So we decided to focus significantly on transition risk and climate related financial risk. In early 2016, I announced the Climate Risk Carbon Initiative.”The initiative has two components. Firstly, Jones has asked insurers to consider divesting from thermal coal. He stresses that this is a voluntary request. “We’ve seen the Dow Jones Coal Index decline some 92% in value over the last three years. We’ve seen 35 US coal enterprises go bankrupt and four major US banks have announced that they are no longer going to lend to new coal infrastructure (JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley are, in one way or another backing away from coal).”

He also notes a number of policy initiatives reducing the reliance on coal, including Californian laws requiring utilities to rely more on renewables as opposed to carbon. “That has led us to conclude that there is a significant risk that coal either is or will become a stranded asset on the books of insurance companies.”

Alongside the request, his office has surveyed the 13,000 insurance companies licensed in California on the size of their coal holdings and if they have divestment plans. It will make this information public.

The second facet of the Climate Risk Carbon Initiative is a requirement that insurers disclose their investments in utilities that derive more than 50% of their electricity from oil, gas and coal.

He explains: “Here we have used a threshold recognising that energy enterprises oftentimes are multi-faceted and may be involved in not only carbon enterprises but renewable enterprises.”

Insurers also must report if they are invested in an enterprise that derives more than 30% of its revenue from coal and 50% of their revenue from oil and gas.

This part of the initiative affects 600 companies that have $100m or more in written premiums nationally. The information collected is currently publicly available on the Californian Department of Insurance website (link).

Jones says: “We found that these insurers had roughly $528bn in fossil fuel-related investments. Roughly $10.5bn invested specifically in thermal coal and they had already divested $4bn in thermal coal and fossil fuel investments and the companies surveyed indicated that they would divest another $944m of thermal coal investments going forward.

“To put this into perspective 13,000 companies that the department of insurance regulates have $7.5trn in admitted assets so $528bn in fossil fuel-related investments is a big number. It gives us a better perspective with regards to the degrees of investments and it is our intention to use this information when we are doing individualized financial examinations of companies and we hope other regulators will as well.”

Some regulators in the US are very unhappy with the initiative. Six Insurance Commissioners from Southern states have asked Jones to end or at least limit the Climate Risk Carbon Initiative to California-based insurers. More seriously, 12 US Attorney Generals from southern states, have collectively threatened legal action.

Mike Hunter, Attorney General for Oklahoma, has written to Jones calling the initiative: “misguided as a matter of policy, questionable as a matter of law, and inconsistent with the principle of comity in the United States”.

The letter, co-signed by Attorney Generals from states including Texas and Utah, as well as the Governor of Kentucky, says they have the responsibility to protect insurance companies and energy business “who are the targets of attempts at public shaming”. Link to the letter.

It says deeming fossil fuels as likely “stranded assets” is alarmist and fiscally irresponsible. It accuses Jones of using his office to promote social causes.

It also suggest that California, a state that generates 6% its power from coal, is intentionally trying to decrease demand for coal and increase demand for energy sources that California uses or produces.

The letter concludes: “If you continue your Climate Risk Carbon Initiative, similar legal action against you is a certainty. The Constitution’s Commerce Clause prohibits illegitimate state regulation aimed at burdening or discriminating against the commerce from other states.”

Jones says he first heard about the letter through a press inquiry from home state media of the one of the Attorney Generals, saying: “It underscores the political nature of the letter.” Soon after, his office issued a statement saying it was “undeterred” by the legal threats.

“It’s unfortunate that 12 Attorney Generals from oil, gas and coal states have written this letter,” he says. “But we are confident that if they do sue we will prevail. We have a state-based system of insurance regulation in the United States and we have appropriately concluded as a financial regulatory department that there are particular risks associated with investment in coal.“This rather hysterical and overwrought letter is completely without merit and it is unfortunate that they are playing to their constituencies who either don’t believe in climate change or don’t believe it’s man made. We are confident if they were to be so foolish to file a lawsuit we would prevail.”

The Climate Risk Carbon Initiative comes under the backdrop of a wider drive in the whole state of California towards a low-carbon economy; for example it was the first US state to launch a carbon price in 2013.

California governor Jerry Brown has recently announced he will gather world leaders in the state for a global warming summit next year, saying President Trump “doesn’t speak for the rest of America,” in pulling out of the Paris Agreement on climate change.

Commissioner Jones, who next year is running to be elected California Attorney General, shares the sentiment: “I don’t think that President Trump is going to be able to hold back the oceans,” he says. “By that I mean all the market, and legislative and policy changes that are occurring are so significant in scope that I don’t believe whatever he is going to undertake at the federal level will be sufficient to countervail.”

Jones has made his action on climate risk integral to his election campaign for Attorney General.

And at the same time, Jones’ old high school friend John Chiang, California Treasurer and board member at CalSTRS, one of the world’s leading pension fund campaigners against climate change, will be seeking to be elected California governor.

California – the world’s sixth largest economy in its own right – is proving to be the pushback to Trump’s withdrawal of the US from the COP21 Paris Agreement.