Consultation response
In its response to the EIOPA consultation on sustainability risk plans and the integration of sustainability risks in Solvency II, Finance Watch calls for improvements to climate scenario analysis, time horizons, and the treatment of fossil fuel-related exposures.
On 26 February 2025, Finance Watch responded to the EIOPA consultation on the proposal for Regulatory Technical Standards on management of sustainability risks including sustainability risk plans. The consultation sets out proposals related to the use of climate scenario analysis, the treatment of long-term risks, and expectations for the design of sustainability risk plans by insurers.
Finance Watch welcomes EIOPA’s efforts to strengthen the prudential framework in response to growing climate-related risks. However, Finance Watch highlights specific areas requiring further attention and strengthening.
Climate scenario analysis alone is not sufficient to capture sustainability risks
Finance Watch recommends including clear disclaimers about the limitations of scenario analysis in risk assessments and calls for insurers to adopt additional risk management provisions and capital measures to address the uncertain and incomplete risk view that scenario analysis provides.
Clarifications are needed regarding the time horizon used for sustainability risk assessments
Long-term horizons must be aligned with the EU 2050 climate neutrality target. The one-year horizon used in the Own Risk and Solvency Assessment (ORSA) will not ensure that sustainability risks are adequately incorporated, as they are likely to materialise over longer time periods and be underestimated in the short term. Therefore, a focus on measures to facilitate transition in the real economy to mitigate these risks is essential.
Upgrades are still needed to properly capture sustainability risks
Finance Watch supports the recognition of the interconnections between CSRD/ CSDDD transition plans and sustainability risk plans. This is in line with the EBA guidelines that stated that deviation risk (misalignment of portfolios with relevant EU objectives and climate targets) needs to be assessed. See the Finance Watch publication ‘Safe Transition Planning for Banks’ for more information.
Sustainability risk plans should also include measurable targets on exposures to fossil fuel-related companies and projects. Deviating from these targets should result in these companies being treated as high-risk and managed accordingly. These exposures should then be appropriately capitalised, as supported by EIOPA’s own findings and the evidence in its report of 7 November 2024.
Referring to taxonomy alignment for exposure assessment can risk providing the false impression that alignment means the absence of sustainability risks. Additional guidance would be needed here to define a list of sectors highly contributing to climate change at a more granular level of NACE codes, that should always be considered material for sustainability risk assessment if their level of fossil fuel activity is above a minimum threshold
The provisions on remuneration in the RTS should be strengthened to confirm that remuneration should be used as a tool for the integration of sustainability risks and incentives for sustainable investment or underwriting decisions. In general, it is important for insurers to adopt remuneration policies, variable remuneration key performance indicators, assessment practices and payout rules that do not lead to ‘guaranteed variable remuneration’.
