EIOPA confronts the financial risks of climate change – The Commission and EBA must follow suit

In a landmark move, the European Insurance and Occupational Pensions Authority (EIOPA) has recognised that the financial risks of fossil fuel investments are underpriced and recommends adjustments to solvency capital requirements for insurers. Without swift action, these mispriced risks will keep building up, threatening not only Europe’s insurance sector but the stability of the entire financial system. This report comes days after the world central banks’ Network for Greening the Financial System’s (NGFS) tripled the prediction of the economic damage from climate change. Finance watch calls on the European Commission to swiftly implement EIOPA’s recommendations, and on the European Banking Authority (EBA) to respond to the cost of inaction highlighted by NGFS, and accelerate its work on transition risk in banks’ capital framework following EIOPA’s lead.

EIOPA’s technical analysis provides empirical evidence that investments in fossil fuels present financially material risks. Finance Watch, alongside many CSOs, have raised warnings about this for years. Promptly addressing these risks is vital to ensure the resilience of Europe’s insurers and their capacity to support the transition of the EU economy. Finance watch urges the European Commission to implement today’s recommendations swiftly.

Building up capital for climate risk is crucial for insurers in any climate transition scenario: if the transition is timely, fossil fuel reserves may become stranded, leading to significant financial losses; if reserves are exploited, insurers will face escalating climate-related claims. Properly pricing these risks is essential for safeguarding both insurers and EU citizens.

This need for risk-adjusted capital requirements also applies to banks’ fossil fuel lending and investments, which contribute to the build-up of systemic risk. Under the current rules, climate-related risks are not factored in when banks decide to grant loans or invest – in fact, most of the world’s major fossil fuel companies are top rated and thus considered to be low risk. In response, Finance Watch is calling on the European Banking Authority (EBA) to recommend macroprudential measures that not only align with EIOPA’s recommendations but also address the high costs of inaction, highlighted by the NGFS latest climate scenario assessment.

On Tuesday, NGFS substantially raised its estimates of climate-related economic costs. In its latest edition of climate scenarios, NGFS predicts that economic losses from climate change could reach 30% of global GDP by 2100, tripling its previous estimate. However, even these updated scenarios still do not account for climate tipping points, mass migrations, sea level rise, and other critical sources of economic loss, meaning that actual climate losses are likely to be far higher, as highlighted in a YISF paper co-authored by Carbon Tracker Initiative. NGFS itself stated “The economic effects of climate change may be even more severe than projected.”