(Thursday 23 September 2021) Yesterday the European Commission published its proposal for a review of the legislation governing (re)insurers, Solvency II. We welcome the Commission’s first step to integrate sustainability considerations in the Solvency II framework, but in light of the climate emergency and growing social issues, a far more ambitious approach is needed.
Caroline Metz, EU policy officer at ShareAction said: “In their roles as risk managers and investors, insurers have a major interest in a smooth transition to a more sustainable economy. Our research shows that much work remains to be done to raise the standard of responsible investment and underwriting in the EU. Yet the Commission still lets insurers off the hook when it comes to their contribution to climate change, and their ability to deal with wider sustainability risks.”
The Commission has introduced a new requirement for insurers to conduct climate change scenario analysis, that is, to identify and assess how climate change risks will impact their business.
Caroline Metz said: “It is an important step for the Commission to recognise that climate change will continue to materially affect insurers – pay-outs related to extreme weather events are a recent case in point – but we are disappointed that the Commission is currently only considering climate risks, and no other sustainability risks just as likely to affect insurers.
“We are equally disappointed to see that the Commission fails to act on its recent commitment to consistently integrate the notion of double materiality across the financial system. Indeed, if one is to be serious about tackling the challenges of our time, insurers should be required to assess not only the impact of climate and sustainability issues on their business, but also the impact that their own business activities have on our planet and societies. Insurers cannot on the one hand be managing everyone’s risks, and on the other be contributing carelessly to these risks.”
The requirement to conduct climate change scenario analysis is in line with the Task Force on Climate Related Financial Disclosure (TCFD), a framework the G7 committed to making mandatory across the economy. But the Commission’s proposal does not go as far as the TCFD guidance for insurers, both in terms of scope and level of details required. It is important to ensure alignment with TCFD.
On the crucial question of capital requirements, the Commission has decided to kick the issue into the long grass. It has tasked the European Insurance and Occupational Pensions Authority (EIOPA) to explore by 2023 a dedicated prudential treatment of exposures related to assets or activities associated with environmental and/or social objectives, and to review regularly the parameters of the standard formula pertaining to natural catastrophe risk.
Caroline Metz said: “In requesting EIOPA to investigate the risk profile of environmentally and socially harmful investments by insurers, the Commission rightly recognises that sustainability risks should be better reflected in Solvency II. Yet, as the Commission itself acknowledges, achieving the ambitions of the European Green Deal requires the channelling of large amounts of investments from the private sector, including from insurance and reinsurance companies, towards sustainable investments.
At this stage, Solvency II does not reflect the full risk of investments in environmentally or socially damaging activities. In fact, it provides insurers with extremely problematic incentives to invest in and insure highly risky fossil fuel-related assets and activities. This goes against the risk-based nature of Solvency II and the wider objectives of the EU’s Sustainable Finance Strategy, and we hope that the Council and European Parliament, and EIOPA on a more technical level, will act to correct this as a matter of urgency.”
The newly published proposal omits to consider sustainability risks in crucial areas of the legislation. The review of Solvency II must not be a missed opportunity for the EU to safeguard the long-term stability of European insurers, and to show ambitious sustainability leadership on the global stage.
It is now up to the EU Member States and the European Parliament to come up with a braver response and uphold the principles and objectives of the Paris Agreement and the European Green Deal. In our recent briefing, we provide recommendations on how to ensure a much better consideration of sustainability by insurers in Europe.
