Investment portfolios of Austrian pension funds risk 7.5% hit if CO2 prices jump
The investment portfolios of Austrian pension funds may drop by as much as 7.5% in the event of sudden fossil fuel price spikes, the country's financial market watchdog has warned.
Austria will have to see a steep cut in carbon emissions in order to meet the targets set out in the Paris Agreement, with carbon reductions of up to 43% by the end of the decade required, Austria's Financial Market Authority (FMA) warned.
The Austrian regulator also warns that the country, whilst being landlocked is exposed to significant flood risks, with the change of extreme weather events rising by 110% if targets aren't being met.
This in turn would increase the probability of a stronger than anticipated policy response, such as a sudden increase in carbon taxes, which would have drastic effects on asset prices, the regulator warned.
According to a stress test carried out by FMA, a sudden price in fossil fuel prices as a result of drastic policy measures to cut CO2 emissions could result in significant asset price corrections across bonds and equities.
The FMA's estimates are based on Europe-wide risk modelling produced by EIOPA and the European Systemic Risk Board (ESRB).
The FMA scenario assumes that valuations of Austrian sovereign bonds would drop between 5% and 8% government bonds are likely to lose 6.4% of their value, corporate bonds 5.7%, and equities 17.3%, the FMA said.
The regulator also factored in that, corporate bond valuations could drop between 1.8% and 7.9% and equities between 16,8% and 17,7%.
At present, close to 30% of Austrian pension fund assets are exposed to climate risks, dominating sectors such as fossil fuel energy, real estate and climate-related projects the regulator said.
Assets under management totalled just over €25bn at the end of the first half of this year, an increase of 3.4% from €24.5bn at the end of last year. This included roughly 18% held in defined-benefit schemes and 82% of assets in defined-contribution or hybrid plans, the FMA disclosed.
In recent years, there is a significant appetite among Austrian pension funds for real estate, with close to 20% of their total assets in this asset class.
The current Austrian government has hinted it may take measures to discourage investors from making new or significant investments in traditional and 'dirty' energy sources, such as oil, gas and coal, in order to drive investment flows towards renewables.
The FMA also said that Austrian pensions returned 3.8% this year, up from -9.7% at the end of 2022, managing pension commitments for more than one million Austrians, a slight increase compared to last year.