The EU sustainable finance taxonomy from the perspective of the insurance and reinsurance sector

• Author: Marie Scholer and Lazaro Cuesta Barbera
• Profession: European Insurance and Occupational Pensions Authority (EIOPA), members of the Technical Expert Group on Sustainable Finance
• Pages: 88-103

THE EU SUSTAINABLE FINANCE

TAXONOMY FROM THE

PERSPECTIVE OF THE INSURANCE

AND REINSURANCE SECTOR

Marie Scholer and Lazaro Cuesta Barbera96

ABSTRACT

This article investigates how much investment held by in surers may be eligible to the EU

sustainable f‌inance taxonomy. To this aim, Solvency II item-by-item investment data is em-

ployed. As part of the Green Deal, the Commission presented the European Green Deal

Investment Plan, which will mobilize at least €1trillion of sustainable investments over the

next decade. Our results suggest that currently only asmall portion of the insurer’s invest-

ments are made in economic activities which might be eligible to the EU sustainable f‌inance

taxonomy as the insurer’s exposures are mainly concentrating toward f‌inancial activities. On

one hand, this can be interpreted as an indicator of limited exposure to transition risk for the

insurance sector but on the other hand also indicates that insurers have the possibility to con-

tribute more signif‌icantly to transitioning to alower carbon society in the future. As major

long-term investors, insurers could play akey role in the transition towards more sustainable

society. In this respect, the taxonomy can help insurers by providing clarity in identifying

sustainable economic activities and avoiding reputational risks.

. INTRODUCTION

Following the adoption by the EU of the Paris Agreement97 on climate change and the UN

2030 Agenda for Sustainable Develo pment98, the “European Green Deal” (COM, 2019)

seeks to make Europe the f‌irst climate neutral continent by 2050. Sustainability and the

transition to alow-carbon, more resource-ecient and circular economy are key in en-

suring long-term competitiveness of the EU economy. In this regard, the EU sustainable

f‌inance taxonomy (hereinafter, the taxonomy) is atool designed to facilitate the identif‌i-

cation of sustainable economic activities with the ultimate goal to reorient capital f‌lows

towards sustainable investment. To assess how much investment held by in surers may be

eligible to the taxonomy, granular Solvency II investment data reported by the European

96 European Insurance and Occupational Pensions Auth ority (EIOPA), members of the Technical E xpert Group

on Sustainable Finance.

97 http://unfccc.int/paris_agreement/items/9485 .php

98 https://sustainabledevelopment.un.org/post2015/transformingourworld

EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY

88

solo insurers and reinsurers for Q3 2019 have been mapped against the economic activ-

ities covered the taxonomy through the relevant NACE99 codes. This overview will allow

us to obtain abetter idea to which extend insurers investments could contribute to the

transition towards alow carbon economy.

. THE EU SUSTAINABLE FINANCE TAXONOMY

AND ITS USE BY INSURANCE AND REINSURANCE

UNDERTAKINGS

BACKGROUND AND OBJECTIVES

In 2016, the Commission appointed aHigh-Level Expert Group on sustainable f‌inance

with amandate to recommend f‌inancial reforms on which to base the EU strategy on

sustainable f‌inance. Beginning of 2018, this expert group published areport (HLEG, 2018)

advocating, among other recommendations, for the introduction of aunif‌ied EU classi-

f‌ication system- or taxonomy– to provide clarity on which activities can be considered

‘sustainable’.

In order to gradually create such a unif‌ied classif‌ication system, the Europ ean Commis-

sion prepared aproposal for aregulation on the establishment of aframework to facil-

itate sustainable inves tment (Taxonomy Regulation) in May 2018100 and set up aTech-

nical Expert Group (TEG) to develop recommendations on the technical criteria for the

identif‌ication of sustainable activities. InMarch2020, the TEG published its f‌inal report

on taxonomy (TEG, 2020), which sets out the basis for afuture taxonomy in legislation.

The main goal of the taxonomy is to help investors and companies make informed in-

vestment decisions on environmentally friendly economic activities. The taxonomy is

aclassif‌ication tool with alist of economic activities with performance criteria for their

contribution to six environmental o bjectives: climate change mitigation; climate change

adaptation; sustainable use and protection of water and marine resources; transition to

acircular economy, waste prevention and recycling; pollution prevention and control;

and protection of healthy ecosystems.

To be included in the proposed taxonomy, an economic activity must contribute sub-

stantially to at least one environmental objective and do no signif‌icant harm (DNSH)

to the other f‌ive, as well as meet minimum social safeguards (e.g. OECD Guidelines on

Multinational Enterprises and UN Guiding Principles on Business and Human Rights).

METHODOLOGY

In practice, the taxonomy is af‌ive steps process as shown in Figure 1. In order to use

the taxonomy, companies will f‌irst need to identify which economy activities could be

eligible using the NACE industrial classif‌ication system of economic activities. Second,

for each identif‌ied activity, they need to assess whether the activity meets the relevant

99 NACE is the statistical classif‌ication of e conomic activities in the European Co mmunity and corresponds to

afour-digit classif‌ication providing the fr amework for collecting and presenting a large range of statistical data

according to economic activity.

100 https://ec.europa.eu/info/publications/1805 24-proposal-sustainable-f‌inance_ en#risks

FINANCIAL STABILITY REPORT

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