Austrian investment funds could suffer losses in the range of €6.6bn-19.7bn in the next five years in the event of shocks caused by the transition to a green economy, according to a climate stress test conducted by the Financial Market Authority (FMA).

Green funds with a lower exposure to CO2-intensive investments are better protected from turmoil than brown funds with higher exposure to CO2-intensive investments, the regulator added.

FMA conducted the stress test looking at three scenarios including a political shock resulting for example from the introduction of a tax on CO2 emissions, a technological shock leading to the use of innovative technology to cut CO2 emissions or of renewable energy sources and the consequent depreciation of existing technologies (“stranded assets”); and change in the behaviour and approaches of consumers or investors relating to CO2-intensive products and services.

The regulator’s climate stress test is based on guidelines by the European Securities and Market Authority (ESMA), which published a report on climate-related risks and vulnerabilities for investment funds (see box below).

The stress test revealed that risks linked to the transition to a sustainable economy can lead to “substantial aggregated losses in value” for investment funds in Austria of between -3% and -9% within a period of five years.

A political shock causes losses of -4.9%, a technology shock of -3.1%, and changes in preferences of consumers or investors of -7.2% in asset value. A simultaneous political and technological shock would lift losses of up to -9% which equals to €6.6bn- 19.7bn based on the current volume of assets in investment funds.

Austrian funds invest 24.5% of total assets, or €53bn, according to sustainable criteria, the regulator said in its analysis, adding that 347 of the total of 1,974 funds can be classified as sustainable according to standards on disclosure obligations set at EU level.

According to FMA, sustainable funds carrying the “Austrian Ecolabel for Sustainable Financial Products” UZ49 have seen an inflow of €10.1bn within one year, as of September.

It also said that 103 funds with assets under management of € 23.6bn, and two real estate funds with a total volume of €609m, are already invested according to the UZ49 eco label.

Brown vs green funds

ESMA conducted an analysis on climate risks in the investment fund industry using data corresponding to €8trn in holdings held in investment fund portfolios in Europe.

According to the research, funds hold the largest positions in equities with approximately €3trn, corporate bonds worth around €1.3trn, and in shares of other funds worth €1.1trn.

Investment funds are considered to have the largest exposure to climate-sensitive economic sectors such as utilities, transport and fossil fuel extraction. They can also invest in other funds, which in turn can have exposure to climate risks.

Brown funds, with portfolios tilted towards polluting assets, tend to diversify portfolios over a larger number of companies compared with funds with cleaner portfolios (green funds).

But the diversification, ESMA said, hides a risk of concentration because brown funds “are more closely connected with each other” than green funds, suggesting that climate-related financial shocks are likely to disproportionately affect brown funds.

The losses resulting from climate-related risks for brown funds can range from 9-18 % of affected assets, in contrast to 3-8 % for green funds. Total systemic losses from climate risks can range from €152bn to €443bn.

Brown funds have a more pronounced impact on systemic, wide losses because of their “greater interconnections” than green funds, ESMA added.

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