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ESG consideration is ‘responsible business practice’, says EU regulator

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Including ESG risks and factors in risk management systems is “responsible business practice” rather than a consequence of “a political or regulatory imposition”, Europe’s pension and insurance regulator has said.

Addressing the European Insurance and Occupational Pensions Authority’s (EIOPA) annual conference in Frankfurt yesterday, chairman Gabriel Bernardino said insurers and pension funds should consider physical and transition risks linked to climate change because their business models are based on liabilities and assets with long-term time horizons.

This was also why more and more pension funds and insurers were taking important investment and underwriting decisions in line with their assessment of ESG risks and factors, he said.

Bernardino also urged pension funds and insurers to be “part of the solution” to the climate change problem, suggesting they had a role to play with respect to fighting climate change as well as helping society adapt to its effects.

He cited both the recent report from the Intergovernmental Panel on Climate Change – which set out that rapid, far-reaching and unprecedented changes were needed to limit global warming to 1.5°C above pre-industrial levels – as well as the impact of climate change itself, which meant that “communities, businesses, cities and countries are facing new types and higher levels of risk”.

eiopa sustainable finance panel 2018 conference

Justin Wray, EIOPA deputy head of policy (far right), and other panellists discussed sustainable finance

Insurers and pension funds should use their stewardship role to engage with investee companies to incentivise them “to take concrete steps towards a lower carbon footprint”.

“This will ensure that the necessary transition to a low carbon economy is done in a gradual and stable way, avoiding financial stability incidents and the emergence of pockets of stranded assets,” Bernardino said.

During a panel discussion, Justin Wray, deputy head of the policy department at EIOPA, said that insurers and pension funds, “helped by regulation and supervision, need to shine a torch in every corner of their business”.

It was “particularly important” that pension funds and insurers not only considered the impact of sustainability on their investments but also the impact of their investments on sustainability, he said.

Wray also suggested it was important that any reorientation of investment by insurers and pension funds was a result of a long-term approach rather than because of any short-term regulatory moves.

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