European Parliament Advances ESG Update to Solvency II

The position to update Solvency II includes provisions for transition planning aligned to CSRD and explicit integration of ESG risks into insurers’ risk management processes.

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has agreed on a position to update Solvency II, including provisions for transition planning aligned with the disclosure requirements of the EU’s Corporate Sustainability Reporting Directive (CSRD), and explicit integration of ESG risks into insurers’ risk management processes.

Additionally, the position ensures supervisory oversight of the measures insurers implement to manage ESG risks in the short–, medium–, and long–term.

However, NGO Finance Watch has raised concerns about the provisions on ‘capital relief’, as they go beyond the recommendations of the European Insurance and Occupational Pensions Authority (EIOPA) in terms of financial stability and policyholder protection.

While the reduction in capital requirements aims to encourage long-term real economy investment from the insurance industry to support sustainable transition, it deviates from the core risk-based logic of prudential regulation, it said.

According to Finance Watch, this approach may not adequately assess and manage risks, especially when climate-related risks are not yet fully reflected in insurers’ capital requirements.

Julia Symon, Head of Research & Advocacy at Finance Watch, said: “More work needs to be done to ensure capital requirements account for climate-related risks, such as the risks associated with fossil fuel exposures, which are bound to lose their value in the sustainable transition.”

“Investments in fossil fuels are incompatible with insurers’ long-term risk view. The EIOPA mandate adopted by the Parliament remains key to further work on this.”

Moving forward, trialogue negotiations will be pursued with the aim of reaching a final agreement by the co-legislators before the end of the current legislative mandate.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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