EU regulator adds double materiality to pension fund rules

The consideration of ESG factors is currently voluntary for European retirement schemes.

EU workplace retirement schemes will need to integrate a double materiality approach and ensure diverse management teams, according to proposals by the EU pensions regulator.

Double materiality incorporates the impact that investment decisions have on the broader environment, in addition to the traditional risk-based approach to sustainability which considers financial risks and opportunities in isolation.

Under the current EU regime, the IORP II directive, pension funds are not required to integrate sustainability factors in their investment decisions but can do so when prudent and on a voluntary basis.

The European Insurance and Occupational Pensions Authority (EIOPA) is now mulling the creation of an explicit duty for funds to account for “sustainability risks in their investment decision”, and “the potential long-term impact of their investment strategy and decisions on sustainability factors”.

The proposals have been tabled as part of a wide-ranging review of IORP II launched on Friday. The shift from direct benefit to direct contribution schemes in Europe and globally means that pension fund beneficiaries will bear more risk and choice, and will need clear insight on the nature of financial risks, said EIOPA.

The regulator has proposed amending IORP II to require investment decision-making to reflect the sustainability preferences of scheme members and beneficiaries when possible and when in their long-term interests. But EIOPA acknowledged that further guidance could be needed to address “potential conflicts of the needs of members arising due to differences between members’ characteristics, namely according to the cohorts, gender, cultural backgrounds”.

Some 48 percent of EU member state regulators have reported that pension funds under their purview do not collect member views on sustainable investing practices.

Finally, EIOPA has drafted new requirements for pension schemes to develop a shareholder engagement policy on a comply-and-explain basis. Schemes have “a role in the sustainability transition”, said the body, and should consider engaging on sustainability issues or divesting when change seems unlikely.

EIOPA is also considering new diversity and inclusion requirements for the selection of pension scheme management bodies by way of a quota for an underrepresented gender, which will be decided internally by the schemes. A policy on how to increase representation will also need to be developed.

Stakeholders have until 25 May to respond to EIOPA.