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Are insurance balance sheets carbon-neutral? Harnessing asset pricing for climate change policy


Due to its enormous size and capital base, the insurance industry has the potential to play a key role in countering climate change. To this end, the major capital flows associated with its investment and underwriting businesses would need to 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 carbon-intensive positions on their balance sheets. The framework should be accompanied by two simple policy changes to reinforce its effectiveness.

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  2. For mutual insurers, the equity stakes cannot be easily separated from the policyholder stakes and are not traded on an active market (see, e.g., Braun et al., 2015). Thus, our carbon test is unfortunately not applicable to this widespread legal form of insurance companies

  3. Examples for such "sin stocks" are tobacco, alcohol and gaming enterprises.

  4. In 2005, the European Union Emissions Trading System (EU ETS) was launched as the first GHG trading scheme in the world. Although the EU ETS was initially criticised for its large number of emission certificates, market fundamentals changed and prices have increased notably in recent years.

  5. One CO2 emission certificate permits the owner to emit one ton of CO2 or other gases that damage the climate with the same intensity.

  6. Exceptions existed for coal plants in Eastern European countries.

  7. An average brown coal power station can produce one kWh of electricity through the emission of 1.1 kg of CO2. The current market price for one kWh on the German electricity market is approximately EUR 0.3, and the cost for the emission allowances per kWh is approximately EUR 0.03.

  8. We construct HMLINS, ROEINS, and PRETINS slightly differently from Ben Ammar et al. (2018)‚ who developed their model for U.S. property-liability insurers, since we work with European data. More specifically, we sort the sample insurance stocks by the respective characteristics (previous year b/m ratio, previous year ROE, previous month return) and form equally weighted tercile portfolios. The risk factors are then derived by subtracting the last tercile (lowest value) from the first tercile (highest value) portfolio.

  9. To validate this effect, we collected monthly stock return data over the period January 2017 to December 2018 from two types of companies based in Europe: (i) "green" business models (e.g. from the renewable energy sector), and (ii) carbon-intensive business models (e.g. from the fossil fuel power industry). Subsequently, we regressed the excess return time series of each company on the European five-factor asset pricing model of Fama and French (2015) plus the CO2 factor. The excess return series for the five European Fama-French factors were obtained from Ken French's library. In line with those factors, the excess returns of the European stocks and the CO2 factor were converted to USD. We found the average \(\beta_{CO2}\) of "green" companies (0.16) to be higher than the average \(\beta_{CO2}\) of carbon-intensive companies (− 0.11), on a statistically significant level (p = 0.01). The respective results are available from the authors upon request.



  12. For the purpose of anonymisation, the names of the insurers have been redacted. The anecdotal evidence mentioned in the sections “A rapid test of carbon exposure” and “Detecting further sustainability dimensions” can be found in Allianz (2018), Generali (2018), Aviva (2018), Buthelezi (2019), Storebrand (2018), Swiss Re (2018a), on the Munich Re website, and on the Reuters website.

  13. The carbon beta of Insurer 18 displays a similar evolution over time‚ but it ends up insignificant in 2018.


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We thank Christophe Courbage (Editor-in-chief), two anonymous referees, Joan Lamm-Tennant (Chair of the Shin Research Excellence Awards Program), and the judging committee of the Shin Research Award for their helpful comments. We are also grateful for comments received during conferences at the University of Liechtenstein and at the IIS Global Insurance Forum 2019 in Singapore.

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Correspondence to Alexander Braun.

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This paper has been granted the 2019 Shin Research Excellence Award—a partnership between The Geneva Association and the International Insurance Society—for its academic quality and relevance by the decision of a panel of judges comprising both business and academic insurance specialists.

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Braun, A., Utz, S. & Xu, J. Are insurance balance sheets carbon-neutral? Harnessing asset pricing for climate change policy. Geneva Pap Risk Insur Issues Pract 44, 549–568 (2019).

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  • Climate change
  • Sustainable insurance
  • Carbon emissions
  • Asset pricing