Climate Risk and Sustainable Finance in Europe:
The Role of Insurance
Dr. Manuela Zweimüller, Head of Policy Department, EIOPA
Dr. Christian Thimann, Chairman of the Management Board, Athora Deutschland Holding
Moderation: Prof. Dr. Helmut Gründl, ICIR, Goethe University
The insurance sector as the largest institutional investor with a long-term investment prospect plays a key role in financing sustainable growth. At the same time, insurance companies are particularly affected by climate change. They have to pay out more to policyholders as extreme weather events become more severe and more frequent. Also, they face losses as climate change hits the companies they invest in. Thus, climate change poses risks for insurance companies that have to be evaluated and priced. What is the impact of climate-related risks on the insurance sector and how can investment portfolios of the insurance sector be mobilized to finance the transition towards a sustainable economy? Those questions were addressed at the 14th Talks on Insurance and Regulation hosted by the International Center of Insurance Regulation (ICIR) at the House of Finance.
In his speech Christian Thimann, Chief Executive Officer of Athora Deutschland Holding, emphasized the importance of the financial sector and its regulators in financing a sustainable European economy. He reminded that the Paris Agreement in 2015 for the first time had mentioned the financial sector’s key role in re-directing private capital-flows towards sustainable investments. As chairman of the EU-Comission’s High-Level Expert Group (HLEG) Thimann had been substantially involved in developing a comprehensive program of reforms on sustainable finance. Based on the HLEG’s recommendations the EU-Commission had come forward with an Action Plan in March this year, which set the re-orientation of private capital-flows towards sustainable investments as number one priority.
Thimann pointed-out that a lot of progress had already been made in understanding how environmental risks affect the financial system. “Also, we have a good notion of how to assess, and report those risks. However, on the action level we do not move fast enough,” he criticized. “There is still a risk that we fail on the issue, not because we are not aware of the risks, but because there are still not enough capital flows in renewable energy, in CO2-reduced transportation and in resource-protecting food production.” According to the EU-Commission to achieve to EU’S climate targets agreed in Paris, additional 180 billion Euros a year are needed.
Thimann considers the focus in financial markets on short-time investment horizons one of the major obstacles in re-directing private capital streams towards sustainable projects in infrastructure. Especially the accounting principles of IFRS which are based on mark-to-market values were damaging. “The regulator concentrates on the short-term, although we would need long-term investments,” Thimann said. The focus on short-term value extraction from equities created a lot of volatility and instability in the market which made it very difficult to finance sustainable projects.
He reminded the audience that a few regulators have the power to steer the financial sector in a different direction, through common guidelines and by determining capital weights on long-term investments such as infrastructure. “By turning a few switches they can have an enormous impact on the economy,” he stated.
Manuela Zweimüller, Head of the Policy Department of the European Insurance and Occupational Pensions Authority (EIOPA), answered that long-term investments were desirable, in order to account for long-term liabilities. “However, we will not serve political interests but keep a risk- and evidence-based approach in regulation,” Zweimüller stated and pointed-out that the relaxation of capital requirements for certain “green” investments could come at a price for consumers.” First of all, the risk of such investments had to be analyzed and evaluated properly as EIOPA had already done for investments in infrastructure projects and infrastructure corporate bonds. Besides, the result of such risk analysis could also mean that capital charges for “green” investments may go up.
Zweimüller argued against a specific mandate for EIOPA to foster sustainable investments. Considering EIOPA’s role to protect consumers and strengthen financial stability, sustainability considerations are already embedded in its activities. Also, she questioned the need for a major adaption of the prudential regulatory framework, as ESG (environmental, social and governance) factors are inherently included in Solvency II and particularly in its risk management requirements, and also referred to in the IORP II Directive (Institutions for Occupational Retirement Provisions).
Zweimüller outlined several activities of EIOPA in line with the EU-Commission’s Action plan. EIOPA for example participates in developing a sustainable taxonomy, which helps to create an EU classification system as well as standards and labels for “green” financial products.
Zweimüller stated that more robust stress testing were needed to evaluate the effects of climate change for insurers on both sides of the balance sheet, on their assets as well as their liabilities. Moreover, it had to be examined to what extent “green” investments are suitable for private investors and how to avoid “greenwashing”. The entire product development cycle should take ESG factors into account from product design to distribution. “EIOPA does not intend to prescribe how insurers should invest or whom/what to insure but rather has a challenging role how the forward looking aspects of climate-related risks are addressed. Our responsibility as a supervisor is to foster a so-called stewardship approach of the insurance sector to use its influence for a gradual transition towards a more sustainable economy,” Zweimüller concluded.