The European Insurance and Occupational Pensions Authority (EIOPA) will analyse European pension funds’ exposure to “ESG” in next year’s biennial stress test of the sector, a spokeswoman has confirmed.

The two-part analysis will involve a qualitative assessment of how occupational pension funds incorporate environmental, social and corporate governance (ESG) factors into their processes and assess the exposures of their investment portfolio, the spokeswoman said.

This will be complemented by a quantitative exercise, with a focus on identifying business activities that are prone to being exposed to risks related to a transition to a low-carbon environment.

Speaking about the stress tests at a conference in Brussels on Monday, Matti Leppälä, CEO of PensionsEurope, said the qualitative ESG-related section would include questions about pension funds’ policies, for example in relation to voting and engagement, and the impact of the Shareholder Voting Rights Directive on pension funds.

The quantitative part would involve asking pension funds how much of their portfolio is exposed to the most emissions-intensive business sectors, he said.

Leppälä said EIOPA was engaging with stakeholders such as PensionsEurope and emphasised that the plan for the stress test had not yet been adopted.

The EIOPA spokeswoman said the supervisory authority was taking “its first steps to get a more tangible understanding of IORPs’ exposure to ESG”.

A recent study of the impact of climate change on Dutch pension funds’ coverage ratios found that these could drop by up to 80% if global temperatures rose by 4°C, and 20% if global average temperatures only rose by 1.5°C above pre-industrial levels.

ESG risk move well trailed

In 2016, the European Systemic Risk Board proposed that stress tests of the financial sector by European supervisory authorities (ESAs) should include risks stemming from a late low-carbon transition. EIOPA last year indicated that it would probably include ESG aspects in the 2019 pension fund stress tests.

At the time, EIOPA said: “ESG aspects including climate change will be of growing importance for the pensions sector and will require cautious assessment of any financial stability implications.”

This was in line with a proposal from the European Commission for EIOPA and its counterparts to incorporate sustainability considerations into their work, from the perspective of ensuring financial stability and “thereby making financial markets activity more consistent with sustainable objectives”.

Enhancing the ESAs’ role in assessing ESG-related risks was one of the recommendations made by the High Level Expert Group on sustainable finance.

Sustainable finance is very clearly on EIOPA’s agenda, not least because it dedicated a significant part of its recent annual conference to the topic.

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