Assets invested by German occupational pension institutions can lose up to 14% of market value, whereas Austrian schemes would lose around 10% of their assets because of risks resulting from climate changes and an abrupt transition to a greener economy, based on the recent stress test conducted by the European Insurance and Occupational Pensions Authority (EIOPA).
For German pension schemes the stress test was carried out both on the basis of the national accounting standard – the Commercial Code Handelsgesetzbuch (HGB) – and on the basis of a uniform European standards developed by EIOPA.
The market value of German schemes’s assets fell by 14%, according to EIOPA’s standards, and by only 4% according to HGB standards, financial regulator BaFin said.
“The results of the stress test show that climate change can result in significant risks for IORPs [Institutions for Occupational Retirement Provisions],” BaFin’s executive director Frank Grund said.
He added: “As part of their risk management, IORPs should also consider climate change scenarios that lead to write-downs on all major types of capital investments under HGB.”
In Germany, Allianz Pensionskasse and Versorgungskasse, BASF and Bayer Pensionskassen, the pension provider for the German financial sector BVV, Bosch, Siemens, Metzler and Willis Towers Watson Pensionsfonds took part in the EIOPA climate stress test, among others.
In Austria a quarter of the assets (27%) in the portfolios of Austrian pension funds is exposed to climate-related risks, according to the country’s Financial Market Authority (FMA).
Cliamte change pressure on investments, meaning a massive increase in the cost of carbon emissions, would lead to a loss of around 10% of the assets held by occupational pension institutions in Austria, it added.
The test conducted by FMA, within the framework set by EIOPA, revealed that under climate change pressure the total value of assets falls by close to €2.7bn (-9 .51%), from €28.4bn to €25.7bn.
On average, climate change would lead to a 12.2% loss in assets, with costs ranging from -1% to -15.6%, for the pension funds tested by EIOPA in 18 Euroepan Union member states, based also on assumptions by the European Systemic Risk Board (ESRB).
The stress test also showed that, with the exception of one pension fund, all Austrian occupational pension institutions take into account ESG risks in their investment strategies.
Pension funds predominantly favour external ESG ratings/indices to review sustainability factors in investments, with existing assets in portfolios scrutinised for physical and transitory risks relating to climate change, the FMA said.
The climate stress test was calibrated by assuming that delaying actions to reduce CO2 emissions would cause carbon prices to rise sharply, and analysing inflation hedging strategies of company pension schemes.
In Austria, Allianz Pensionskasse, APK Pensionskasse, BONUS Pensionskassen, Valida Pension and VBV Pensionskasse took part in test.