Environmental groups have welcomed the European parliament vote to include transition plans as part of Solvency II – but expressed disappointment with proposals on capital relief and the rejection of the ‘one-for-one’ rule.
Members of the European parliament have voted in favour of transition plans for insurers, to show how they will address risks from environmental, social and governance issues.
During the vote on the Solvency II law, the parliament’s economic affairs committee backed a call for insurers to set up transition plans and targets, based on disclosures from the EU Corporate Sustainability Reporting Directive.
Environmental campaigners welcomed the move but raised concerns about the amount of capital relief on offer for insurers, and insisted the plans must be fully aligned with climate science if they are to genuinely phase out investments in fossil fuels.
The decision is “an important step”, said Henry Eviston, sustainable finance policy officer at the non-profit WWF, in a press statement. However, he added that plans must include “short-term targets that are truly in line with the Paris Agreement” and that insurers failing to follow science-based plans should “face regulatory consequences from supervisors”.
The NGO also said transition plans should cover underwriting and investment, with implementing actions and specific, science-based short, medium and long-term targets, including absolute emission greenhouse gas reduction targets for 2025 and 2030.
The WWF also criticised the failure in the law to include a “one-for-one” rule, whereby €1 of financing for fossil fuel activities would have to be matched with €1 of a lender’s own funds. Eviston said: “Investing in new fossil fuel projects is a recipe for environmental disaster and for a financial crisis.
“Insurers should have been required to set aside €1 for every euro they put into these risky investments, to absorb any losses from them. No taxpayer wants to bail out a company that takes unnecessary and avoidable risks.”
Further, the WWF described the decision to not require insurers to manage ESG risks linked to the activities that they insure as a “major loophole”. It said that the agreed text would require insurers only to address risks arising from their own investment portfolio, “even though insurance is the main reason insurers and reinsurers exist, and this side of the business is increasingly affected by payouts for floods, wildfires, droughts and other environmental risks”.
Brussels-based non-profit Finance Watch, meanwhile, highlighted the fact the capital relief terms agreed in the vote go beyond what the European Insurance and Occupational Pensions Authority has advised. “Overly reducing capital requirements moves away from the core risk-based logic of prudential regulation to properly assess and manage risk, notably in the situation where climate-related risks are not yet reflected in the insurers’ capital requirements,” the NGO said.
Finance Watch head of research and advocacy Julia Symon said: “More work needs to be done to ensure capital requirements account for climate-related risks, such as the risks of fossil fuel exposures, which are certain to lose their value in the sustainable transition. Investments in fossil fuels are incompatible with the insurers’ long-term view on risk.”
Gold standard
Caroline Metz, senior EU policy officer at UK-based non-profit ShareAction, offered a similar opinion, saying: “As extreme heatwaves spread across the globe, and as insurers themselves feel the hit of claims arising from climate catastrophes, the need for insurance regulation that meaningfully steers the industry away from risky and harmful fossil fuel activities could not be clearer.”
Metz called for “less capital relief, fewer exemptions, and much more robust sustainability measures for insurers” – such as “one-for-one” capital requirements and “the introduction of mandatory stewardship so insurers systematically drive their investee companies towards more sustainable business models”.
According to German centre-right MEP Markus Ferber, who proposed the changes on capital relief, the vote would “allow insurance companies to invest in the green transition without putting clients at risk”.
“Solvency II is the world’s gold standard for insurance regulation, but so far, its calibration has been overly conservative,” he added.
Trilogue negotiations will now follow between the European parliament, European Commission and EU member states, with a view to reach a final agreement before the end of the current legislative mandate in 2024.