German occupational pension institutions including Pensionskassen and Pensionsfonds, and insurance companies, rarely conduct stress tests or scenario analysis to assess climate risks.
According to a survey conducted by German financial supervisory authority BaFin, 78% of the occupational pension institutions that took part stated they had not yet conducted any stress tests, 39% said they were preparing such tests, and only 13% said they had already carried out stress tests.
So far “surprisingly” only under a quarter of the institutions surveyed, including 10 institutions for occupational retirement provision (IORPs), stated they use sustainability-related stress tests or scenario analysis, and less than half stated they are at least preparing appropriate stress tests, the regulator added.
Asked why Pensionskassen, Pensionsfonds and insurers don’t carry out stress tests on a regular basis, a spokesperson for the BaFin told IPE that there isn’t an obligation to conduct such analyses.
However, from the point of view of the supervisory authority, there is an urgent need to catch up on this point, therefore BaFin expects insurance companies that fall under Solvency II to conduct corresponding scenario analyses as part of a company’s own risk and solvency assessment (ORSA) from this year onwards, the spokesperson added.
BaFin surveyed 399 companies from the banking, insurance and securities sectors. Among the participants, 260 companies were considered part of the insurance sector, including 82 company pension schemes.
The regulator underlined that a high share of pension funds and insurance companies are already aware of the topic of sustainability and ESG factors.
Occupational pension institutions take into account mostly governance factors (85%), social factors (84%) and risks relating to the transition to a sustainable economy (84%).
Insurers, instead, take all aspects of sustainability into account, including physical risks resulting from extreme weather, risks related to the transition to a climate-neutral economy, but also social and governance factors.
According to the survey, the institutions are primarily concerned with identifying and monitoring sustainability risks (98%) and avoiding negative impact on to their reputation (96%).
The research also revealed that over three quarters of the institutions surveyed are actively addressing the issue of sustainability and want to use the opportunities arising from the transition to a sustainable economy in a targeted manner and actively manage sustainability risks.
Pension institutions are concerned about the consequences of physical and transitory climate risks on asset management, particularly in the form of investment in equities and fixed income, that are most frequently affected by those risks.
The report further showed that 66% of the occupational pension institutions use external ESG ratings, 49% external credit ratings including ESG factors, and only 15% internal ESG ratings.
Additionally, 75% of the respondents stated to have integrated sustainability risks into existing written guidelines for asset management, and 77% in the investment process.
Also, 48% of the occupational pension institutions that responded to BaFin’s questions have designed a business strategy to cope with sustainability risks or adapted an existing strategy, and 66% have now a risk strategy.
The strategies are designed to define specific sustainability goals, or for engagement, or to align business activities with political objectives to exploit growth opportunities and avoid the negative consequences of policies as far as possible, BaFin said.