Pension providers in Sweden should consider stress testing their portfolios for the risks posed by climate change and stranded assets, the country’s regulator has said.
Although ruling out further regulation in the immediate future, Finansinspektionen’s report to the government said it saw an advantage in financial institutions’ considering such risks when conducting scenario analyses and other stress tests.
It argued that such assessments could provide a rapid assessment of the risks that could impact financial stability, and how they could best be addressed – while initially looking at more qualitative, rather than quantitative, scenarios, such as how the changing climate might impact companies’ business models.
The suggestion comes shortly after the European Systemic Risk Board said it might include carbon risk in future stress-test scenarios proposed to the European supervisory authorities, including the European Insurance and Occupational Pensions Authority’s next stress test for the pensions sector, due in 2017.
Additionally, the regulator said any scenario stress testing would require consistent, comparable and reliable carbon data disclosure – either nationally or internationally, and referenced the work currently being undertaken by the Financial Stability Board’s taskforce on climate-related financial disclosures.
The report, based on work undertaken by the UK’s Grantham Research Institute, nevertheless concluded that the Swedish pensions sector was less exposed to climate risks that other EU markets.
Its sample of Swedish pension investors – AMF, Alecta and the four main AP funds – reported a lower exposure to high-carbon assets than similar pension investors in other EU countries, such as the UK and the Netherlands.
Finansinspektionen concluded that, overall, the Swedish financial sector was less exposed to climate risks than other markets.
The regulator’s call for a uniform carbon-reporting framework comes after the government in November threatened to legislate for a framework, if the commercial pensions sector failed to come to its own agreement on disclosure and reporting.
The threat came shortly after the AP funds announced details of a new, uniform carbon-reporting framework for all six of the funds.