European Pension Regulator Launches Climate Risk Stress Test for 2022

The regulator imagines what will be the effects of a climate shock to pension funds’ balance sheets.

The European Insurance and Occupational Pensions Authority is launching a stress test tomorrow to determine the resilience of European pension funds during a climate emergency.

The climate test primarily examines what would happen to pension funds if investors faced a dramatic rise in carbon prices due to the extreme effects of climate change. The hypothetical scenario assumes that no new climate policies are introduced before 2030 and that carbon technology is largely unavailable. Because of this, in the hypothetical, governments enact extremely strong policies in 2030 that dramatically increase the price of carbon.

The potential financial effects of such a situation will be applied to a balance sheet to figure out just how pension funds and their investments would be affected. Due to the cut-off date for developing the scenario, the test will not reflect the recent shock to the energy sector caused by the war in Ukraine.

The scenario focuses on sector-specific shocks, and EIOPA hopes that it will shed insight as to which investment strategies bear the most risk. All pension funds with more than 500 million ($550 million) are required to participate in the exercise.

The test was developed by the Network for Greening the Financial Sector. EIOPA is also conducting two questionnaires: one to follow up on analysis from the 2019 stress test, and one to assess the potential consequences of inflation for benefit recipients.

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