The Effect of Climate Regulatory Actions on Credit Allocation: Evidence from the Insurance Industry 

Abstract

We study how climate-change-related regulatory actions affect credit allocation. We use the National Association of Insurance Commissioners (NAIC) Climate Risk Disclosure Survey, which mandates selected insurers to report their climate risk management practices, as a natural experiment. Insurers subject to the disclosure mandate significantly tilt their portfolios away from high-climate-risk corporate bonds. High climate-risk bonds disproportionately held by mandated insurers experience significant negative returns. The portfolio reallocation is stronger for insurers whose revenues rely more on underwriting than on investment income, a pattern more consistent with regulatory pressure than with updated risk assessment as the primary mechanism. Our results suggest that even soft regulation in the form of disclosure requirements can reshape the portfolio allocation of insurance companies-the largest institutional holders of corporate bonds-and the pricing of corporate credit.

Keywords: Climate Change, Transition Risk, Regulation, Credit Allocation, Insurance Companies

JEL Classification: G11, G22, G23, G28, Q54