Insurers and reinsurers that invest in fossil fuel stocks and bonds should hold additional capital to account for the specific financial risks these assets represent according to the European Insurance and Occupational Pension Authority (EIOPA). (1) Published as part of the EU insurance supervisor’s final report on the prudential treatment of sustainability risk, the decision (2) clearly recognizes that fossil fuel assets pose a higher risk, saying they cannot be considered as standard investments. This marks a shift in the way supervisors look at the sector. Reclaim Finance welcomes this decision and urges policymakers to review prudential rules accordingly and all European financial authorities to reflect this in their own frameworks.
In December 2023, the EIOPA consulted on a draft report (3) on the prudential treatment of sustainability risks, which included a policy option to increase capital charges for insurers’ fossil fuel-related investments based on a quantitative analysis. EIOPA has now endorsed this proposal, highlighting the need for legislation to be reviewed in order to increase capital charges for fossil fuels. (1) In its letter to the European Commission (4) the authority notes that: “A supplementary capital requirement on fossil fuel-related assets emerges as a comprehensive approach, providing a robust mechanism to better align capital requirements with their risk exposures”.
Reclaim Finance welcomes the decision which marks a shift in the way financial supervisors look at financial services provided to the fossil fuel industry. It clarifies that assets tied to the sector should not be treated in the same way as other assets and that they bear inherent risks for the financial sector (5).
EIOPA could, and arguably should, have gone further. Limitations in modelling technics and a conservative approach to risk calculation mean that this constitutes a relatively limited adjustment to capital charges which will not yet fully tackle the potential risks from fossil fuels. As the EIOPA underlines, (4) “the additional capital requirement for insurers may have a minimal impact on the market”. But for now the major question is whether this change will be finalized, amplified and replicated throughout the financial sector.
Indeed, EIOPA’s decision must be translated into binding legislation by the European Commission and other EU policymakers. Furthermore, despite also being under EIOPA’s supervision, insurance activities are not covered by the current proposal or by similar fossil fuel capital changes. Similarly, banking activities under EBA and ECB supervision are yet to be addressed (5). Considering these gaps, Reclaim Finance calls for a swift update of prudential legislation and adaptation of all frameworks, integrating the inherent risks tied to fossil fuel financing and insurance.
