Friends of the Earth, ShareAction and WWF write to EU member states on ESG in pension directive

A group of 12 civil society groups including leading NGOs such as Friends of the Earth, ShareAction and the WWF, have written to each European Union member state calling on them to support environmental, social and governance (ESG) factors in the revised European pension fund directive.

It comes as the process enters the negotiation phase with the informal “trialogue” process of wrangling between the European Commission, the member state-level Council and the European Parliament set to begin next week. The revision to the IORP directive was kicked off almost two years ago, partly with the aim of helping long-term investment.

A draft text of the revision to the directive, officially the Institutions for Occupational Retirement Provision (IORP), was passed by the European Parliament’s Economic and Monetary Affairs Committee on January 25.

An earlier draft had weakened the language around ESG but the approved final text ended up with stronger wording around the consideration of ESG factors in the investment process, transparency and information to members, the groups say.

They argue the revisions are crucial because IORPs in the 28-member bloc hold over €3.2trn of assets. The letter cites the 2015 meta-study by Deutsche Asset & Wealth Management that concluded there’s a link between ESG and financial performance.

“As pension funds are a significant investor group in the global economy, they have the potential and duty to influence positively the behavior of their investee companies,” the letter states, citing the example of the VW emissions scandal.

An important point raised in the letter is confusion about whether the ‘prudent person principle’ permits IORPs to consider ESG factors.The original text of the directive, introduced in 2003, set the “prudent person” rule as the underlying principle in capital investment, though its inclusion was hotly debated at the time.

The principle is a somewhat nebulous maxim restricting the discretion in a client’s account to investments that a prudent person might choose for themselves. It is also enshrined in the sweeping Solvency II insurance directive.

The NGO letter points to studies by the Principles for Responsible Investment and the UK’s Law Commission which show that fiduciary duty is seen as being a duty to maximize short-term returns and exclude ESG and long-term factors. “As such we believe that an IORP II directive which overly relies on the prudent person principle will not be effective at promoting long-term sustainable investment.”

The NGOs suggest the following wording: “The ‘prudent person’ rule shall not prevent institutions from taking into account the potential long-term impact of investment decisions on environmental, social, governance or ethical factors.” The letter has been sent to the Financial Attachés at each member state’s Permanent Representation; the trialogues start on February 29.

List of signatories:

• ShareAction

• ActionAid

• Friends of the Earth (UK and Europe)
• The Finance Innovation Lab

• Preventable Surprises

• Urgewald

• Global Witness

• ClientEarth

• E3G

• Frank Bold

• CORE coalition

• WWF