Time to adapt

Good morning and thank you for joining EIOPA Sustainable Finance Conference. It my pleasure to welcome you today and deliver this keynote speech. It is heartening to see so many of you joining us virtually for such an important topic for the future. Today, I will briefly introduce the main theme of the conference, adaptation, and outline some avenues to adjust to a changing climate, environmental, societal and digital landscape. I will also touch upon the role supervisors, financial institutions and consumers can play in building the resilience necessary for adaptation. Finally, I will consider the power of technology in facilitating the transition to a more sustainable and inclusive economy. 

Let me start with the title of the conference: today, we are confronted with major transformations, which compel us to adapt. Climate change is a reality that affects the financial sector, the economy and society at large and we know that fighting against it requires a reduction in greenhouse gas emissions. However, climate change mitigation alone is not enough. To address climate change financial institutions, companies and citizens need to adjust to it now and minimise its future impact. 

We should not forget that the Paris Agreement includes a Global Goal on Adaptation, which aims to support the Agreement’s temperature reduction goal, and recent discussions at the COP27 showed the importance of increasing adaptive capacity and improving resilience. Repairing damages caused by climate-related physical risk is very important, particularly for vulnerable countries, but it will not make them more resilient to future climate hazards. And these, a consequence of climate change, affect all countries around the globe.

However, adaptation goes beyond climate. The environment and nature are also changing, largely as a consequence of climate change, with effects on weather patterns, water availability and biodiversity. More generally, this has wider societal impact: throughout the transition to a more climate-friendly and sustainable economy, you can have winners and losers. It is key to ensure inclusion but for this to happen, we need to adopt a different mindset. Hence, it is “Time to adapt”. 

But what exactly is required to strengthen adaption efforts? In my remarks I will focus on the financial sector and refer in particular to EIOPA’s remit, i.e., insurers and pension funds. Adaptation is about managing climate and environmental risks by adjusting economic agents’ behaviour to minimise climate-induced damage and improve resilience. But it is also about addressing consumer detriment and ensuring inclusion, leaving no one behind. 

I will argue that supervisors have a clear role to play. Now you may wonder: why should supervisors look at adaptation at all? Well, climate change and environmental damage have macroeconomic implications: they affect key economic variables, including income, savings, and investment, and impact on companies and households’ finances. All of this is relevant for the financial sector, both as service provider and as investor (for example, for insurers when offering policies to customers but also when investing their assets). 

Supervisors’ fundamental role is to identify, assess and ensure the management of risks to the financial sector, companies and consumers. Take the example of natural catastrophes. They are increasing in frequency and intensity and risk coverage in Europe is low and patchy. Supervisors can help by collecting and analysing data to reduce blind spots and improve risk awareness by supervised entities, businesses, and consumers. EIOPA has further developed its dashboard on insurance protection gap for natural catastrophes: the updated version has just been published and you will be receiving a presentation on it later today. 

Supervisors also set expectations on fair treatment of customers through product oversight and governance: EIOPA has been working on identifying the drivers of protection gaps and contributing to solutions. Let me just mention at this point the Climate Resilience Dialogue organised by the European Commission, in which EIOPA participates, aiming to address the protection gap. Ms de la Torre is here with us today and will provide you with more details on this major project.

A quick reminder on the importance of climate stress testing, which provides insights into the effect of climate risk on the financial sector. I suggest you stay tuned with EIOPA as we will publish the results of our first climate stress for the occupational pension sector next week. 

Besides clear knowledge of risks and gaps, adaptation requires the actual management of these risks via risk-based solutions and an appropriate regulatory framework. The ability to identify and price climate-related risk is essential for the financial sector to develop, offer and invest in products that contribute to the fight against climate change. But do sustainability features in a certain product make the investment less risky? And is the past a good indicator or is it ignoring transition risks and hence not factoring in adaptation? These are key questions to determine whether the regulatory framework should be adjusted to include sustainability risks and factors. It is a topic we have been exploring: EIOPA has conducted a preliminary analysis and it will also be subject of discussion in today’s conference. 

From a risk-based perspective, EIOPA has been working to detect common risk drivers and identify possible solutions to address protection gaps along three key dimensions. First, the supply side, with a focus on pricing and product design: how can we reduce losses through preventive measures, which are reflected in insurance pricing? This is what we call ‘impact underwriting’. Second, the demand side: we have been conducting a behavioural analysis of consumers preferences to understand why they do not purchase insurance coverage. Third, the macro aspect: we have been studying the macro-economic implications of protection gaps and underlined the important role of insurers to strengthen societal resilience. 

However, in some cases risk-based solutions, even when supported by an appropriate regulatory framework, might not be sufficient to cover systemic climate-related risks: shared resilience solutions must be established to improve societal resilience. Going back to the example of natural catastrophes, their increasing frequency and intensity is raising affordability and availability concerns. In a nutshell, insurers are either offering expensive insurance policies, which companies and consumers cannot afford, or they are no longer providing coverage for this type of risk (just think about the pandemic, another systemic risk). This runs counter to our objective to improve climate resilience. That is why public-private cooperation could support insurability, thereby contributing to adaptation. But let me stress that public sector intervention (and the use of public money) should be minimised and everybody should have ‘skin in the game’.

Finally, a word on sustainability reporting. Reporting of sustainability information by companies is essential to ensure transparency to investors, including insurers. Only by knowing which companies are acting in a sustainable manner insurers can make informed decisions about the placement of their assets, thereby contributing to adaptation. In the EU, European Sustainability Reporting Standards (ESRS) are being prepared to this end. 

Let’s now turn to the role of technology in helping supervisors, financial institutions and consumers in the effort to adapt to environmental, climate and other societal changes. Adaption is a broader societal issue, which requires long-term vision and an open mind to draw on digital innovation. To be able to factor in transition risks and the related social impact that are linked to adaptation, supervisors need to follow a forward-looking approach in risk assessment. This is where technology is essential. 

Supervisors can become more efficient using artificial intelligence (AI) and machine learning (ML). They can do so by drawing on the amount of data technology makes available, including in relation to sustainability. Supervisors can use AI to analyse and train IT systems to learn from such data and feed the results in their analysis of climate risks. In this respect, it is essential to find solutions to share risk assessment and data in an open-source environment. Supervisors can also use technology to improve macroeconomic modelling of the socio-economic impact of climate change and natural catastrophes (or other systemic risks, e.g., pandemics).

Finally, supervisors can support the industry to mitigate the risks and seize the opportunities of the digital transformation and promote a data-driven culture. Technological innovation, together with sustainability, are key objectives of the strategy we recently published, which sets out EIOPA’s priorities for the years to come. AI and open insurance applications, i.e., accessing and sharing insurance-related personal and non-personal data via IT platforms, can play a role in this field. I look forward to hearing more on ideas and tools to adapt using technology in the impulse talk this afternoon. 

Financial institutions can also benefit greatly from -and contribute to the development of- digital technology, including through open data. For example, digital applications that predict climate hazards and weather events, based on big data analytics, can provide useful information to insurers and their customers. At the same time, technology can help insurers incentivise preventive behaviour. As an example, insures could offer reduced premia to those customers adjusting the structure of the buildings to improve resilience or considering climate patterns when seeding crops. Obviously, this needs appropriate privacy and cyber security safeguards. Technology can also help SMEs, for instance to reach customers via online services, hence saving on transport costs.

Consumers too play a role in adapting to the changing reality of climate, including by harvesting the benefits of digital innovation. Consumers can purchase insurance against major climate-related risks, such as weather disasters. They can also take a closer look at where they build their house to avoid disaster-prone areas. Thanks to technology, consumers should be able to compare offers more easily and switch to providers who serve better coverage. In line with incentives hopefully offered by insurers, policy holders can adjust their behaviour to prevent risks from materialising. Behavioural data would feed into industry and supervisors’ assessments, creating a positive circle in a data-driven economy. 

However, a word of caution is needed on the risks for vulnerable groups or, in other words, under-served groups to be subject to detrimental practices (e.g., differential pricing) or be excluded (think about the elderly or the less digital savvy). Digital innovation should not happen at the expense of financial inclusion. 

Let me mention, at this point, that consumers are also vulnerable to being sold products that are marketed as “green” while they are not. This is what we call “greenwashing” and supervisors are looking into ways to minimise the risk. In this respect, improving financial literacy and financial inclusion are key steps. EIOPA is also working on greenwashing and I am sure the panel on the topic this afternoon will discuss it in depth. 

Before concluding, I would like to reflect on one point: consumers can play an active role in adaptation: as savers, they can decide to place their money in climate, environmental and socially-conscious products. However, as pension fund beneficiaries, they tend to rely on financial institutions who invest their savings on their behalf. This is why the role of IORPs in considering sustainability, and possibly membership’s preferences for sustainable investments, deserves our close attention. You will be hearing more about the subject in the afternoon. 

Let me now conclude with the key message I started my remarks with. Climate change mitigation is important and might have got us where we are today, but it is no longer enough: it is “Time to adapt” to a changing climate, environment and society. Efforts to adapt, build societal resilience and ensure inclusion are key going forward. To do so, as supervisors we need a clear view of risks and gaps. We should also reflect on whether the regulatory framework remains appropriate or could be adjusted to facilitate the transition to a more sustainable and inclusive economy. Risk-based solutions will help but we should consider shared resilience solutions for systemic risks. While supervisors, the industry and consumers can play a role in adaptation, technology will be crucial. More importantly, a change of mindset is required. Indeed, with the right mindset we can all benefit from technology, contribute to adaptation and ensure value for money and ultimately for society as a whole. Thank you for your attention and I hope you will enjoy EIOPA Sustainable Finance Conference.