Pension funds should avoid ‘stranded assets’ – proposed amendment of European directive

Stranded assets should not be part of a long-term investment strategy of pension funds, according to a proposed amendment to the European pension fund directive.

So-called stranded assets should “not be part of a long term investment strategy” the proposal states – adding that pension funds should have “effective mechanisms” in place for detecting such risks.

The directive, the Institutions of Occupational Retirement Provision (IORP), was first enacted in 2003 and is currently undergoing revision at the European Parliament and the concept of ‘stranded assets’ popularised by Carbon Tracker has made its way into the most recent draft thanks to Dutch Green MEP Bas Eickhout.

Eickhout’s amendment is to Recital 34 of the draft and adds to original wording proposed by the European Commission, the executive arm of the European Union, which states that ‘low carbon and climate resilient infrastructure projects are often non-listed assets and rely on long term credits for project financing’.

The new amendment adds this wording: “Conversely, so called “stranded” assets that derive their value from the assumption that raw materials can be used in the future even though their use would be contradictory to Union social or environmental policy (including health) should not be part of a long term investment strategy and pension schemes should have effective mechanisms for detecting such risks.”The move has been made on behalf of the Greens – European Free Alliance (Verts-ALE or Greens-EFA) group at the Parliament and comes via Eickhout’s role as a ‘shadow rapporteur’ at the powerful Committee on Economic and Monetary Affairs (EMAC) at the Parliament.

“Pension schemes should have effective mechanisms for detecting such risks.”

The rapporteur helps shepherd legislation through the EU system and the rapporteur for IORP at the committee is Brian Hayes, an Irish MEP for the Fine Gael Party aligned with the Christian Democrats.

Another amended wording comes from Anneliese Dodds, a UK Labour MEP, with her text calling for institutions, as part of their risk management system, to produce a risk assessment that “should cover, inter alia, environmental, social and governance risks”.

The IORP directive in its current form was adopted 12 years ago – after much wrangling – with the aim of ensuring full investment freedom of pension funds (Article 20 laid down the prudent person investment principle) and to facilitate cross-border activities. It is now being recast in what is being termed IORP II. Link