PensionsEurope has said that it was glad to see that the results of the European Insurance and Occupational Pensions Authority (EIOPA) climate stress test of Institutions for Occupational Retirement Provisions (IORP) showed a “limited” impact on the funding ratio of defined benefit (DB) schemes.

In its response to the stress test, which was published on 13 December, PensionsEurope noted that the impact of the climate change scenario modelled by EIOPA was limited, with declines in funding ratios of a few percentage points.

The stress test showed equity and corporate bond investments in carbon intensive industries, such as electricity and other energy production sectors, had seen “steep write-downs” of between 20 per cent and 38 per cent in the climate change scenario.

PensionsEurope noted that while it takes any vulnerabilities of IORPs seriously, there were numerous other aspects to consider when investing in electricity and other energy producers that should not be ignored.

“Major investments are needed in electricity and various other energy production sectors to implement the long-lasting and long-term objective of the EU to increase its energy independence,” commented PensionsEurope CEO/secretary general, Matti Leppälä.

“The same applies to speed up the shift to low-carbon power and heat production where many companies producing energy are currently making significant investments in low-carbon production.

“In addition, demand for electricity in Europe continues increasing with electrification, which brings numerous benefits that go beyond decarbonisation, and where investments are urgently needed."

Furthermore, the association warned that the impact of ongoing geopolitical tensions and sanctions should not be ignored when discussing the investments in carbon intensive industries.

It added that energy stocks have “rocketed” this year, and from a risk diversification point of view it would have been risky to exclude energy stocks from IORPs’ investment portfolios, and a significant need for fossil fuels still remains in Europe.

PensionsEurope noted that while, according to the report, over 90 per cent of IORPs incorporate ESG factors in their policy, up from 55 per cent in 2019, IORPs use different classification systems, standards and guidance to determine if an investment can be classified as ‘sustainable’.

"The EU Taxonomy offers an assessment of whether activities are environmentally sustainable, which does not capture all responsible investment approaches,” said Leppälä.

“There are many best practices and approaches of how pension funds consider sustainability factors, and therefore, it is important to note that having a high share of ESG assets under the taxonomy does not become synonymous with responsible investment."

Finally, PensionsEurope said that it felt cashflow analysis would have been a better-equipped methodology to fully capture the economic climate change scenario in the 2022 stress test in a more meaningful way.

“In addition, it would also have given a better understanding of inflation shocks lasting multiple years and provided more added value for the risk management of IORPs,” Leppälä concluded.

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