Günther Thallinger did not mince his words when he recently wrote about the financial risk a 3°C-world would present to asset owners like Allianz.

“Capitalism as we know it ceases to be viable,” said the chair of the German insurer’s investment board in a blog post.

Extreme weather events and temperature rises will eventually hit all assets, he warned.

“Heat and water destroy capital. Flooded homes lose value, overheated cities become uninhabitable.”

Governments will be unable to continue footing the bill, especially when insurers like Allianz start refusing to provide cover to properties and businesses that become too risky.

And adaptation measures won’t be enough to keep a lid on the problem.

“The idea that market economies can continue to function without insurance, finance and asset protection is a fantasy,” said Thallinger.

“There is no capitalism without functioning financial services. And there are no financial services without the ability to price and manage climate risk.”

Thallinger’s comments, which got major pick-up on social media and in national and trade press, were a clear call to action.

He claimed investors and other decision-makers have just two options if they want to keep the economy below that 3°C limit: ensure greenhouse gas (GHG) emissions aren’t produced in the first place, or capture them before they enter the Earth’s atmosphere.

“Heat and water destroy capital. Flooded homes lose value, overheated cities become uninhabitable”

Günther Thallinger, Allianz’s investment board chair

Capital allocation shrinks carbon footprint

And Allianz has been busy trying to bring down the emissions associated with its own investments.

In its latest sustainability report, it claims to have decarbonised its corporate bond and listed equities portfolios by more than 50% since 2019.

The reductions are driven by a number of factors.

Some are less meaningful than others, such as the fact that it uses EVIC to calculate its denominator, which means that when enterprise values go up, emissions are divided across a greater number of monetary units, resulting in the numbers going down even when emissions have stayed the same.

But that accounts for less than 10% of the reductions.

Real-world decarbonisation, that is emissions reductions from companies actually becoming greener, also accounts for less than 10% – a reality with more significant implications for Thallinger’s 3°C warning.

Allianz’s progress is instead mainly down to a reallocation of capital.

This includes a significant increase in green bond investments, for example, which it discounts massively in its carbon accounting methodology.

Allianz accounts for 100% of an issuer’s emissions when it calculates its own footprint for a conventional bond. But, according to its sustainability report, if it buys a green bond from the same company – and therefore supports its transition to a greener business model – it only accounts for 10%.

That has helped shrink the carbon profile of its fixed income portfolio.

Another big driver is its recent decision to ditch fossil fuels. In 2023, the insurer said it wanted to see credible net zero commitments from investee oil and gas producers by 2025. They should cover all GHG emissions, across all scopes, and be aligned with science-based 1.5°C pathways, according to the guidelines it published at the time.

With the fossil fuel industry stepping back from its climate ambitions over the past year, it’s unsurprising that Allianz has now had to exit the entire sector (it quit coal back in 2015).

As part of that divestment, Allianz said it will reallocate just under €5bn of existing oil and gas bonds to other issuers upon maturity.

For the rest of the portfolio, it tilts its investments towards the lowest-intensity companies within each sector.

And Allianz expects progress to continue, for the next few years at least. Its sustainability report predicts it will have reduced the emissions of its proprietary investments by 61% by 2029.

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