23.12.2022
The European Insurance and Occupational Pensions Authority (EIOPA) has published a discussion paper on proactive sustainability risk management with a focus on the real estate sector.
The paper highlights the critical role that real estate markets play in the transition to a low-carbon economy and society, as building construction and energy use contribute significantly to greenhouse gas emissions.
Building operations account for 40% of total energy consumption and 36% of energy-related greenhouse gas emissions in the European Union.
It is estimated that improving the energy efficiency of buildings in the EU will reduce overall energy consumption by 5-6% and carbon dioxide emissions by about 5%.
However, 75% of the EU building stock is considered energy efficient according to current building standards, and the average annual building stock renewal rate is less than 1%.
Insurers in the EU direct about 8% of their investments in real estate, and potential changes in the value of these assets due to energy efficiency could significantly affect their balance sheets.
Energy Efficiency Data Protocol and Portal ( EeDaPP ) has conducted a study showing that investment in building energy efficiency can increase asset value due to lower energy consumption and can also reduce the risk of default on mortgages.
Real estate valuation is usually based on transactions for which relevant data is not publicly available, so the error rate is relatively high.
Therefore, the EIOPA discussion paper focuses on the potential risk of transition in terms of energy efficiency in buildings and how this may affect calculations made for prudential purposes under the Capacity to Pay II Directive.
In addition to the financial risks associated with energy efficient buildings, social risks must also be taken into account.
On average, 20.1% of a household’s disposable income in the EU goes to housing costs, and energy costs have risen significantly over the past decade.
For example, inflation-adjusted electricity prices rose from €0.16/ kWh in 2008 to €0.24/ kWh in 2021.
These rising energy costs can disproportionately affect low-income households and contribute to energy poverty.
The EIOPA discussion paper notes that the impact of energy consumption on household disposable income is a key factor in households’ vulnerability to energy poverty.
To address these risks and promote sustainability, the EIOPA discussion paper proposes actions for insurers, including integrating sustainability risks into their risk management processes, engaging with insurers and other stakeholders on sustainability issues, and supporting the transition to a low-carbon economy through investments and partnerships. relationship.
The paper also recommends that the EU consider establishing a framework for integrating sustainability risks into prudential regulation.
Green bonds
Green bonds are a potential vehicle for sustainability in the real estate sector. These are financial instruments issued to finance projects with environmental benefits, such as renewable energy or energy efficient buildings.
The green bond market has grown significantly in recent years and insurers have the opportunity to play their part in this market by investing in green bonds and supporting sustainable projects. Another important aspect of sustainability in the real estate sector is the use of building energy performance certifications (BEPCs).
BEPCs are documents that provide information about the energy performance of buildings and are used to assess the energy performance of buildings and identify opportunities for improvement.
The EIOPA discussion paper proposes that insurers can use BEPC as a tool to assess the sustainability risks of their real estate investments and engage with policyholders on energy efficiency measures . This creates significant data collection and analysis needs.
While this process is costly, it also provides insurance companies with a unique opportunity to modernize their infrastructure by automating processes to reduce costs and increase their revenues through better pricing for low-risk customers and the agility of online sales. Fortunately, insurance industry professionals have access to data to help them make the right decisions. It remains for them to work with the right organizations that will help them properly collect and analyze this data.
Pavlos Loizou , CEO of Ask WiRE
