Letter calls for reinforcement of the integration of climate risk in the assessment of the solvency of insurance and pensions institutions, which could lose up to 50% of the value of their infrastructure portfolio
In an open letter to the chairperson of the European Insurance and Occupational Pensions Authority (EIOPA), Ms Petra Hielkema, the EDHEC Infrastructure & Private Assets Institute has warned of the consequences of climate risk for insurance and pensions investors.
A research note prepared by the institute, entitled “It’s Getting Physical,” shows that the physical risks created by climate change are not limited to a distant future for investors in infrastructure, some of whom, in the worst case, could well lose more than 50% of the value of their portfolio to physical climate risk before 2050 in the event of runaway climate change. This very high loss potential for a category of asset that is presented as highly risk-free is not only due to infrastructure projects’ exposure to physical risk but is also the result of the considerable level of concentration of portfolios that do not always take account of the climate characteristics of investments in their construction.
The letter, penned by Professor Noël Amenc and Dr Frederic Blanc-Brude, explains that EDHEC has conducted the first in-depth analysis of physical climate risk for unlisted infrastructure investment. Using a very granular database of asset-level physical risk estimates and financial data, the research finds that the impact of runaway climate change on the value of infrastructure investments before 2050 is significant. It also finds that if no serious measures are taken, financial losses from physical risk (which are never zero) would be twice as high than in a low carbon scenario, for all investors.
The authors believe that EIOPA’s position as an advisory body to the European Commission, the European Parliament and the Council of the European Union will allow it to draw attention to the impact that a lack of climate action can have on the stability of the pensions and insurance system and on financial stability more generally at a time when institutional investors are playing an increasingly important role in the financing of infrastructure.
A copy of the open letter to the EIOPA chairperson can be found here:
EDHEC Infrastructure & Private Assets Institute Open Letter to the Chairperson of EIOPA, August 2023
A copy of the research note can be found here:
“It’s Getting Physical,” EDHEC Infrastructure & Private Assets Institute Publication, August 2023
