Are Insurance Balance Sheets Carbon-Neutral? Harnessing Asset Pricing for Climate-Change Policy

Due to its enormous size and capital base, the insurance industry should play a key role in countering climate change. To do so, the major capital flows associated with its investment and underwriting businesses must be redirected towards carbon-neutral activities. Since insurance companies can be viewed as large portfolios consisting of financial risks (asset side) and underwriting risks (liability side), we suggest an asset pricing approach to detect potential carbon-intensive positions on their balance sheets. The framework should be accompanied by two simple policy changes to reinforce its effectiveness.