Insurers and reinsurers are particularly vulnerable to carbon-based assets and liabilities being suddenly or unexpectedly written down or devalued due to climate change, according to a report from Lloyd’s.

The report, written with the University of Oxford’s Smith School, analyses how climate change regulation and taxation policies could leave insurers with stranded assets in the energy, commercial property and shipping sectors.

It recommends insurers stress-test their investment portfolios to limit such exposure, and play a more active role in the companies in which they invest and in shaping environmental policy.

Co-author Ben Caldecott says insurers need to assess environment-related risks in their investments, just as they do for insurance policies.

“Doing so would help avoid stranded assets and ensure investments are appropriately protected in order to meet liabilities,” he said.

Many climate-related risk factors can develop in a specific sector or geography simultaneously, leading assets and liabilities to be written down or devalued.

For example, deployment of renewables, worsening air pollution and drought caused by climate change – plus social pressure to reduce China’s demand for thermal coal – adversely affected Australia’s coal-mine assets.

The China drought of 2010/11 contributed to global wheat shortages and soaring bread prices in Egypt, which in turn contributed to the 2011 Arab Spring and its various repercussions.

The report follows a speech addressing stranded assets by Bank of England Governor Mark Carney at a Lloyd’s dinner in 2015.

“The UK insurance sector manages almost £2 trillion ($3.25 trillion) in assets to match liabilities that often span decades,” Mr Carney said.

“While a given physical manifestation of climate change – a flood and storm – may not directly affect a corporate bond’s value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment.”