OECD pension supervisors say ESG in line with fiduciary duty

New guidance from International Organisation of Pension Supervisors

The integration of environmental, social and governance (ESG) factors into pension investing is in line with fiduciary duty and is something that supervisors should clarify, according to new guidance from the OECD-hosted body that represents international pension supervisors.

In the guidelines published today, the International Organisation of Pension Supervisors (IOPS) said:

“Supervisory authorities should clarify to a pension fund governing body or the asset managers, possibly through regulations, rules or guidelines, that the explicit integration of ESG factors into pension fund investment and risk management process is in line with their fiduciary duties”.

The Paris-based, standards-setting body also backed the use of scenarios in its 10-point guidance, stating that supervisory bodies should “encourage” the development of “appropriate scenario testing” by pension funds and asset managers.

The new IOPS guidelines, which were consulted on earlier this year, are non-binding and are intended to guide regulators, supervisors and other entities involved in supervision of pension risk management and investment.

It also includes the recommendation that pension funds should be required to regularly report on their engagement with investee companies.

IOPS was formed in 2004 and its secretariat is hosted by the OECD. Its 87 members are drawn from more than 75 jurisdictions worldwide, from Albania to Zimbabwe.

The background for the new 28–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.

“Pension funds should give appropriate consideration to any factor which may affect the sustainable long-term performance of funds’ assets”, said Olga Fuentes, IOPS’ acting-President.

“The explicit integration of ESG factors into pension fund investment … is in line with their fiduciary duties.”

“This necessarily implies recognising ESG factors as relevant risks to consider into the investment and risk managements of pension funds. These supervisory guidelines arise from the collaborative work of all member countries and constitute a valuable contribution of IOPS as a standard setter to supervisors worldwide.”

André Laboul, IOPS Secretary General and Head of the OECD Financial Affairs Division, said: “Through these guidelines, the standard-setting community of the International Organisation of Pension Supervisors recognises the key importance of ESG factors for the investment and risk management of pension funds and encourages their integration in related decision processes.

“This is a major step which will hopefully promote the voluntary implementation of these guidelines in IOPS jurisdictions.”