Adjusting capital requirements for fossil fuel exposures and transition planning are the key areas for upgrading the prudential treatment of sustainability risks for insurers.
EIOPA published the discussion paper on sustainability risks for insurers as part of its ongoing work on the topic and ahead of a possible mandate to further investigate the need for targeted prudential treatment as part of the review of the Solvency II Directive.
In its response to EIOPA’s consultation on the discussion paper, Finance Watch highlights the limits of attempting to use historical data to tackle sustainability risks and raises issues with using the EU Taxonomy or ESG ratings to assess these risks.
Finance Watch points to the clear need to include financial institutions in transition risk analysis. The response highlights the need for mandatory transition plans for financial institutions as part of their risk management processes, governance, that are subject to supervisory review.
A crucial point raised in the response is the need and opportunity to address sustainability risks in prudential regulation now. EIOPA should focus on using forward-looking data to establish risk differentials for certain exposure types, which are associated with particularly high environmental risks.