European pension funds should be “exemplary leaders of responsible ownership” – that’s what the European pensions supervisory body EIOPA is saying about how the new ESG provisions in the revised EU pension directive should be implemented by national authorities.
EIOPA, the European Insurance and Occupational Pensions Authority, has issued a non-binding opinion about the new ESG elements in the updated Institutions for Occupational Retirement Provisions directive, known as IORP II.
It calls on regulators in member states, National Competent Authorities in the jargon, to “take a holistic view of pension funds’ exposure to ESG risks”. The body has also mapped how ESG risks may arise in traditional prudential risks.
“As institutions tasked with a social purpose of providing retirement benefits, European pension funds should be exemplary leaders of responsible ownership,” Frankfurt-based EIOPA says.
“Thus, NCAs should encourage pension funds to consider the impact of their long-term investment decisions and activities on ESG factors through their stewardship role, as well as having regard to the impact of sustainability risks on pension fund liabilities.”
EIOPA’s chair, Gabriel Bernardino, said of the opinion (and the others it released alongside it) that it was the “foundation for the future supervisory convergence of pension funds’ own-risk assessment to ensure sound risk management for the better protection of members and beneficiaries and alignment with society’s sustainability goals”.
But PensionsEurope, the umbrella body for national pension associations, took issue with the EIOPA opinion, saying it “misrepresents the legal framework” set by the directive by indicating that IORPs are required to take ESG factors into consideration as part of the investment policy.The Brussels-based group said the directive only requires that Member States do not ban the consideration of the impact of investment decisions on ESG factors.
“Moreover,” it says, “the directive explicitly mentions that IORPs can opt-out of incorporating ESG factors in investment decisions, which is not mentioned at all in the Opinion.”
“Societal objectives should not be forced upon pension funds by supervisors” — PensionsEurope
It notes that while there are IORPs that want to make a societal impact, the “primary duty” of an IORP remains to ensure good pension outcomes for their members.
“Any societal objectives can be adopted voluntarily, but should not be forced upon pension funds by supervisors.”
Matti Leppälä, PensionsEurope CEO/Secretary General said: “If you invest for the long run like a pension fund, ESG risks like climate change should receive attention as part of risk management.
“However, it remains up to the pension fund to decide whether the incorporation of ESG factors leads to better risk-adjust returns.
“We also believe supervisors should not push pension funds towards impact investing. The role of pension funds remains to achieve good pensions for their members and any consideration of societal sustainability objective should remain purely voluntary.”