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International pension supervisory body backs ESG scenario testing

International Organisation of Pension Supervisors sees ESG issues as financial ones

The body that represents international pension supervisors has called for ESG scenario testing of investment strategies.

In new draft guidelines on the integration of ESG factors for pension funds, the International Organisation of Pension Supervisors (IOPS) said: “Supervisory authorities should encourage a governing body or the asset managers of a pension fund to develop appropriate scenario testing of its investment strategy. Such tests should consider all substantial financial factors, including ESG.”

The draft also clearly refers to ESG factors as financial factors.

IOPS is the latest international umbrella body to take a hard look at ESG: last month the International Organisation of Securities Commissions (IOSCO) warned ESG matters could pose “serious threats” to companies.

The new IOPS draft guidelines are voluntary and are intended to guide regulators, supervisors and other entities involved in supervision of pension risk management and investment. They apply to funded private pension funds invested in capital markets.

The Paris-based, standards-setting body was formed in 2004 and its secretariat is hosted by the OECD. Its 88 members are drawn from more than 75 jurisdictions worldwide, from Albania to Zimbabwe.The context for the 11–page guidance includes the Paris agreement, the TCFD and the European Union action plan on sustainable finance. The document explicitly notes the revised European pension fund directive (IORP II), which contains ESG provisions for the first time.

“For the purpose of this document ESG factors will be considered as financial ones.”

“ESG factors are often considered to be non-financial factors or be part of non-financial performance indicators,” the document states. “However, even so, ESG factors may have a direct, and potentially substantial, financial impact on savings and wealth-being [sic] of pension fund members, particularly in the longer term.

“Therefore, for the purpose of this document ESG factors will be considered as financial ones.”

Elsewhere, the document says: “Investment, voting and engagement activities should be reported to pension fund members and stakeholders on a regular basis.” It also raises the topic of carbon footprint disclosure.

The consultation runs until March 11, just a few days after a major IOPS event in New Delhi.