EU pension funds will have to assess climate and social risks under revised directive

New ‘IORP’ text emerges from so-called trialogue negotiation and cites PRI

Pension funds in the European Union will have to assess climate change and social risks under a revision to the existing EU Pension Fund directive that has been agreed following a protracted wrangling process.

The directive, officially the Institutions for Occupational Retirement Provision (IORP), came into force in 2003 and its focus was on cross-border pension provision.

But it is being revised, in part as a component of a wider plan to promote long-term investment by the European Commission, the EU’s executive arm. The Commission was using its revision, known as IORP2, as a way to feed into the broader long-term investment agenda, specifically its Green Paper on long-term financing of the European economy. There are 125,000 IORPs operating in the EU with combined assets of over €3trn.

A draft text of the revision was passed by the European Parliament’s Economic and Monetary Affairs Committee (ECON) on January 25 and went into the so-called ‘trialogue’ system of negotiation between the Parliament, member state level-Council and the Commission.

Now a new compromise text has emerged from this process and been seen by Responsible Investor. It says IORP schemes’ risk assessment should, where relevant, include “risks related to climate change, use of resources, the environment, social risk and risks related to the depreciation of assets due to regulatory change (‘stranded assets’)”.And in a newly inserted article in the draft – which will go to a vote at a Parliamentary plenary session in October – there is this wording: “Environmental, social and governance factors as referred to in the UN Principles for Responsible Investment are important for the investment policy and risk management systems of IORPs.”

It continues: “Member states should require IORPs to explicitly disclose where these factors are considered in investment decisions and how they are part of their risk management system.

“The relevance and materiality of environmental, social and governance factors to a scheme’s investments and how they are taken into account should be part of the information provided by the scheme under this directive.”

Campaign groups had pressed members of the European Parliament calling on them to support environmental, social and governance (ESG) factors in the revised rules. At one point, an earlier draft had weakened the language around ESG but the approved final text out of ECON ended up with stronger wording around the consideration of ESG factors. It was Dutch Green MEP Bas Eickhout who managed to get the concept of ‘stranded assets’ into the text.