Denmark’s Financial Supervisory Authority (Finanstilsynet, FSA) said the country’s pension funds and insurers must draw a clearer line between exercising social responsibility and the management of financial risks resulting from climate change.
The Copenhagen-based financial watchdog released a new report yesterday based on a fact-finding exercise on the topic of climate-related financial risk management.
FSA deputy director Carsten Brogaard said: “We expect the companies to make a greater distinction between social responsibility on the one hand, and the risk management of the company’s and customers’ financial risks as a result of climate change on the other.”
The FSA said that back in December 2019, it had asked all non-life and life insurance companies, sectoral pension funds as well as the pension funds ATP and LD a number of questions about the management of climate-related financial risks.
The new report contains the results of a study based on that information, and is entitled: “Follow-up on Christmas letters from 2019 – Financial risks as a result of climate change”.
In general, the FSA said the firms really wanted to show social responsibility and contribute to sustainable change, just as they also focused on climate change.
“However, it is important that companies separate the desire to exercise social responsibility from the risk management of financial risks,” the FSA said.
Brogaard, who in charge of supervising insurance and pension companies at the watchdog, said the agency recognised that firms worked with social responsibility and wanted to contribute to the sustainable transition, and said that was an important agenda.
“The Danish Financial Supervisory Authority’s core task is to supervise that the companies are robust and ensure the customers the best possible return,” he said.
For many Danish insurance and pension companies, Brogaard said, this was a new risk area, and they were still building up their methods of analysing climate-related financial risks.
“The Danish Financial Supervisory Authority expects the firms to continue to develop the risk management of climate-related financial risks so that they can handle the significance of climate change for their business model,” he said.
The FSA said that according to its study, some providers opted out of investments in the most climate-damaging sectors, or from companies within a sector, in the expectation that such exclusions did not harm the investment portfolio’s expected return and risk ratio.
“The Danish FSA expects the firms to have analysed their decisions and be able to document the consequences of them in the event of major defaults – and that the companies continuously monitor deselected assets regarding whether they can be expected to make a positive contribution to the investment portfolio’s return and risk conditions once more,” the authority said.
Such analysis also had to be seen in the light of what the customer had been offered, the FSA said.