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European pension firms' investments have high carbon footprint, regulator finds

Europe's occupational pensions institutions' investments have a relatively high carbon footprint, their regulator has found in its latest stress test.

The European Insurance and Occupational Pensions Authority's latest stress test of Institutions for Occupational Retirement Provisions, or IORPs, analyzed environmental, social and governance, or ESG, factors for the first time. A comparison of participating IORPs' investment makeup with Eurostat's greenhouse gas emission statistics by business sector "indicates a relatively high carbon footprint, compared to the average EU economy" in both equity investments and, concentrated in a few member states, debt investments, EIOPA said.

The stress test also found that although the majority of participating IORPs had taken "appropriate steps" to identify sustainability factors and ESG risks for their investment decisions, only 30% have processes to manage ESG risks. The test also found that only 19% of the IORPs assess the effect of ESG factors on the risk and return of investments.

Some 176 IORPs from 19 countries participated in the exercise, covering more than 60% of the national defined benefit, or DB, markets and 50% of the national defined contribution, or DC, markets measured by assets in most countries. DB schemes pay out a pension for the remainder of the beneficiary's life, while DC schemes pay out until the pension pot is exhausted. The sample was made up of 99 DB and 77 DC IORPs.

In addition to ESG factors, the stress test looked at how IORPs performed under an adverse market scenario — a sudden reassessment of risk premia and shocks to interest rates on short-maturity investments, resulting in increased yields and a widening of credit spreads.

Under the baseline scenario, the IORPs were underfunded by €41 billion on aggregate, or 4% of liabilities, but the stress scenario pushed the underfunding level to €180 billion according to national methodologies and to €216 billion under the test's common methodology.

Under the common methodology, the shortfalls under the stress scenario would have triggered aggregate benefit reductions of €173 billion and scheme sponsors would have had to provide €49 billion of financial support.