This article was written by Cintia Cheong for Environmental Finance.
Axa Group has calculated the potential value at risk (VaR) in its asset portfolio due to climate change, in a ground-breaking piece of analysis for an insurance company.
The analysis is published in the insurer's first report that complies with Article 173 – the French law on climate risk disclosure – and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Axa calculated the climate VaR for the group's holdings of equities and corporate bonds – which represent 45% of its general account assets – to understand the impact that future climate costs and/or revenues might have on the price of these securities.
The VaR figure represents the percentage of a company's market value that would increase or decrease under particular scenarios.
Axa found that its corporate bonds have a far lower exposure to climate risks than equities, mostly because they pay coupons steadily over time.
In a scenario where average global temperatures rise by 2°C, the group would suffer a $904 million loss in its €16 billion ($19.3 billion) equities portfolio, with a climate VaR of -3.7%. But its €187 billion ($226 billion) bond portfolio would suffer a dent of only $24 million, with a climate VaR of 0.01%.
Under a more positive 'Green Technology Opportunities' scenario, in which some companies generate additional revenues from new low-carbon technologies, the equities portfolio would gain $841 million with a climate VaR of +3.5%. But the gain in corporate bonds is even more slight in this scenario – $7 million, or +0.004%.
Axa has emphasised the preliminary nature of the analysis, saying it is still examining whether the approach could be used to manage its equity and bond investments.
The company's Climate-related investment & insurance report also examines the physical climate risks in Axa's €34 billion property, commercial real estate debt and infrastructure debt portfolio.
It estimates, for example, that the company's real estate in Germany - representing approximately 10% of Axa's real estate portfolio – could potentially lose €400,000/year due to floods and €173,000 due to windstorms. Axa described the figures as "relatively small".
For events potentially occurring once every 100 years, the company could lose approximately €7 million due to floods and €2 million due to windstorms, the report estimates.
You can read the original report from Axa Group here.