We welcomed the opportunity to comment on the approaches presented by EIOPA, the supervisor for insurers and pension funds in the EU, in its December 2022 Discussion paper on the Prudential Treatment of Sustainability Risks, which lays the ground for a potential review of the regulatory treatment (pillar 1 - capital requirements) of insurers’ assets exposed to transition risks, as well as other climate related risks and social risks.

In our response, we urge EIOPA to adopt an evidence-based precautionary approach when looking into the prudential treatment of assets exposed to transition risk. Scientific evidence has established the need for a speedy decarbonisation and the complete end to new fossil fuel exploration (the International Energy Agency concluded that there is no room for new fossil fuel exploration if emissions are to reach net zero by 2050), which is a key basis on which EIOPA should rely. EIOPA should therefore consider that all investments in companies involved in new fossil fuel activities are assets particularly exposed to transition risk, and thus EIOPA should propose a specific prudential treatment that accounts for this. This is in line with the “One-for-one” rule, whereby investments in companies involved in new fossil fuel projects would be subject to a 100% capital charge.

Such a precautionary approach, and a rapid enforcement of a revised prudential treatment of investments in new fossil fuel projects, will not only safeguard the European insurance sector against transition risks and associated costs and disruptions, it will also positively contribute to the transition to a low-carbon economy, and will contribute to the reduction of transition and climate related risks on a systemic level.

See also our recommendations on capital requirements, and our latest recommendations on sustainability measures for insurers in the EU.