EIOPA published a report presenting sensitivity analysis of the climate-change-related transition risks in the investment portfolio of European insurers. The report explores current holdings of corporate bonds and equity that can be related to key climate-policy relevant sectors such as fossil fuel extraction, carbon‐intensive industries, vehicle production, and the power sector. It also quantifies potential climate-change-related transition risks and presents insights into the possible impact of these risks on such investments, as economies transition away from fossil fuel-dependent energy production and carbon-intensive production. The results of the analysis show that these investments may expose the insurance sector to transition risks in the event of a drastic alignment of the economies to an outcome in line with the aims of the Paris Agreement to limit global warming.
EIOPA has established a comprehensive strategy and work-plan under the umbrella of sustainable finance. This report contributes to that work and to informing the future work at EIOPA, including potentially future stress testing. Using data reported under Solvency II and available to EIOPA, combined with external data sources, this sensitivity analysis represents a first assessment of climate-change related “transition” risks in the portfolio of European insurers. To quantify these risks, this report employs a “what-if” scenario analysis based on the identified holdings and government bond holdings to provide insights into possible values at risks under the scenarios and assumptions employed. The “what-if” scenarios draw input from several external sources and combine them in a consistent narrative calibrated on the current holdings of European insurers. Also, this report considers part of the challenges faced by European insurers in this context, namely asset-side transition risks; it does not explore changes to the liabilities and, therefore, does not consider any impact on measures such as own funds or capitalization.
The results in this report show that with relatively conservative estimates for both holdings and price adjustments, losses on equity investments in the high-carbon sector can be high, reaching up to 25% on average for these particular equity holdings (before accounting for any counterbalancing investments in e.g. renewable energy). However, the overall impact on the balance sheets of the insurance sector is counter-balanced both by investments in renewable energy and the fact that the high-carbon investments considered here account for a small part of the total investments of European insurers. Losses on bonds are also lower than those on equities. Solvency II is a risk-based regime and insurers, therefore, generally hold well-diversified portfolios, which is reflected in the overall size of the losses. Despite this, impacts compared to excess of assets over liabilities, a relevant measure of impact, are non-negligible and may be substantial under the more severe assumptions and scenarios considered in this analysis.
Keywords: Europe, EU, Insurance, ESG, Climate Change Risk, Transition Risk, Solvency II, Paris Agreement, Green Deal, Sustainable Finance, EIOPA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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