The European Insurance and Occupational Pensions Authority (EIOPA), the European Union’s insurance and pension-focused financial regulator, announced the launch of its first climate stress test, aimed at testing the resilience of institutions in the pension investment sector to risks related to the transition to a low-carbon economy.

The new stress test, developed together with the European Systemic Risk Board and the European Central Bank, tests the resilience of European institutions for occupational retirement provision (IORPs) to a scenario of sudden, disorderly transition to climate neutrality due to delayed policy action. The scenario envisions a sharp increase in carbon prices, leading to a strong increase in fossil fuel prices, raising energy costs, impacting the general economic outlook, and pressuring equity markets, particularly in carbon intensive sectors. Other effects anticipated by the scenario include rising corporate credit spreads for brown industries, rising yields increasing the cost of issuing sovereign debt, and a slowdown in the value growth of tangible asset classes, such as real estate.

According to EIOPA, the stress test launch comes as sustainability and environmental risk management have become key considerations for long-term investors. In December, the regulator unveiled a 3-year plan aimed at ensuring the integration of sustainability risks into the risk management practices of insurers, re-insurers and occupational pension funds. In addition to stress tests, planned activities under the outline included promoting sustainability disclosures, providing guidance on the supervision of ESG conduct risks such as including greenwashing, and promoting open source modelling and data in relation to climate change risks such as the modelling for natural catastrophes.

The stress test officially launches on April 7, with participating institutions expected to submit results by June 13, and results to be published in December 2022.