EU agreement paves way for ESG factors in new €2trn pan-European pension product

A high-level agreement by representatives of European Union member states will pave the way for environmental, social and governance (ESG) factors to be integrated into a new pan-EU pension product that will potentially gather trillions of euros over time.

The European Council, the overall political leadership body of the EU, has endorsed the agreement reached between the presidency and the European Parliament late last year on the proposed ‘pan-European pension product’ (PEPP).

The PEPP is an ambitious plan to create a pan-European ‘third-pillar’ complementary pension product in the face of low savings rates, demographic change and a fragmented market.

The text of the proposal agreed upon calls for ESG factors to be taken into account: “Low carbon and climate resilient infrastructure projects are often non-listed assets and rely on long-term credits for project financing.

“Considering the long-term nature of their liabilities, PEPP providers are encouraged to allocate a sufficient part of their asset portfolio to sustainable investments in the real economy with long-term economic benefits, in particular to infrastructure projects and corporates.”

The prudent person rule is the underlying investment principle for PEPPs, and the text adds: “The prudent person rule should also take into explicit consideration the role played by ESG factors in the investment process.”Providers are to be encouraged to consider such factors in investment decisions and to take into account how they form part of their risk management system in order to avoid “stranded assets”.

The information on ESG factors should be available to EIOPA, the European Insurance and Occupational Pensions Authority, and to savers themselves.

The text calls for PEPP savings to be invested by “taking into account” the EU’s climate and sustainability objectives under the Paris Agreement, the UN Sustainable Development Goals and the United Nations Guiding Principles on Business and Human Rights.

The idea of the legislation is to create a “simple, safe, reasonably-priced, transparent, consumer-friendly and portable” EU-wide system that complements the existing systems in member states.

In July last year, RI reported that there had been a call for PEPP providers to be prevented from engaging in “aggressive tax avoidance”. The final text states that PEPP providers “should be prevented from investing in high-risk and non-cooperative jurisdictions”.

The PEPP idea grew out of a 2012 European Commission white paper on pensions and also fits in with its Capital Markets Union plans. It’s envisaged that insurers, pension funds, investment firms, banks and asset managers will be able to design PEPPs. An impact assessment estimated the proposal could grow the EU personal pension market to €2.1trn by 2030.