The infrastructure portfolios of European pension funds are at risk of losing more than half of their value due to the physical risks of climate change, EU regulators have been warned.
EDHEC Infrastructure & Private Assets Research Institute has sent an open letter to the European Insurance and Occupational Pensions Authority (EIOPA) urging the body to address the vulnerability of infrastructure to climate change and the potential for this to threaten the stability of EU pensions and insurance systems.
The letter to EIOPA chair Petra Hielkema calls for 鈥渞einforcement 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鈥�.
It refers to a research note by the institute, entitled which argues that 鈥渢he physical risks created by climate change are not limited to a distant future for investors in infrastructure, some of whom 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鈥�.
EDHEC has warned of a 鈥渧ery high loss potential鈥� for infrastructure which is often presented as a 鈥渉ighly risk-free鈥� asset class. This is due in part, it said, to infrastructure assets鈥� exposure to physical risk but it also because of 鈥渢he considerable level of concentration of portfolios that do not always take account of the climate characteristics of investments in their construction鈥�.
The letter, by No毛l Amenc and Frederic Blanc-Brude, also refers to EDHEC鈥檚 recent analysis of physical climate risk for unlisted infrastructure. Using a database of asset-level physical risk estimates and financial data, the research concludes that financial losses from physical risk could be twice as high than in a 鈥渓ow carbon scenario鈥� for all investors if no 鈥渟erious measures are taken鈥�.
EDHEC said: 鈥淭he authors believe that EIOPA鈥檚 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.鈥�
As reported in 91传媒在线, EDHEC has been developing climate benchmarks for infrastructure, focusing on two distinct areas: the carbon intensity of assets and their exposure to physical climate risk.
