EC sustainable finance action plan 'is important' for pension funds

The European Commission’s sustainable finance action plan “is important” for pension funds, setting forth helpful but also potentially problematic measures, according to PensionsEurope.

The association said many of the measures would be beneficial for institutional investors.

They would improve the scope of sustainable investments and expand the amount of information available to institutional investors on environmental, social and governance (ESG) aspects of investments, it noted.

Matti Leppälä, secretary general of PensionsEurope, said: “[The] Action Plan signals political commitment to an ambitious agenda for a more sustainable financial system. As its end-users, pension funds look forward to those actions that will bolster their responsible investments.”

The association – an umbrella organisation for national pension fund associations in Europe – would have preferred a different outcome on the topic of investor duties, however.

Following recommendations made by the High Level Expert Group (HLEG), the Commission has said it would table a legislative proposal to “clarify” investors’ duties with regard to sustainability. This is subject to the outcome of an impact assessment by the Commission, however.

It is not clear if the impact assessment is still ongoing, although it closed for feedback in December. In connection with the assessment, the Commission last year carried out a public consultation on investors’ duties with regard to sustainability. This closed at the end of January.

PensionsEurope said the Commission’s action plan foresaw a revision to the IORP II Directive to amend investor duty. The HLEG had suggested the Commission could propose “omnibus” legislation, which would amend various existing EU laws in one go.

Matthies Verstegen, policy adviser at PensionsEurope, told IPE that the association had to adapt to the fact that Commission action on investor duties’ with regard to sustainability was now a reality.

“We still would prefer to see the ESG measures in IORP II transposed and implemented first, but as the Commission is going ahead we have to look at the details and make it work,” he said.

IORP II is the EU’s revised pension fund legislation, which EU member states have to turn into national law by January next year. It contains provisions related to pension funds’ consideration of ESG factors.

About the Commission’s action plan, PensionsEurope’s Leppälä said: “The Commission… wants pension funds to incorporate ESG factors in investment decision-making as part of a review of the fiduciary duty, so pension fund board members should expect to give even more consideration to the topic in the future.

“At the same time, the EU proposals should remain sufficiently flexible not to upset the role of trustees or social partners. Pension funds’ main purpose will continue to be serving the best interests of their members and to delivering adequate pensions at low costs.”

European pension funds employed a wide variety of responsible investment strategies already employed by pension funds, depending on national traditions, the type and size of the fund, the position of the sponsoring company and the role of the social partners, noted PensionsEurope.

Verstegen suggested the association would pay close attention to any proposals about pension funds incorporating beneficiaries’ views on ESG matters into their investment decision-making.

“There should be sufficient flexibility in finding out members’ preferences, for example through representative bodies or directly,” he told IPE. “It is also not yet clear how pension funds should weigh these preferences against the traditional duty to act in the member’s best interest.”

The Commission’s action plan did not speak about pension funds needing to consult members on sustainability and take these views into account. The HLEG, upon whose recommendations the Commission’s action plan is built, did, however, and linked this with its recommendation for investors’ duties with regard to sustainability to be made clear.

PRI: Action Plan ‘an opportunity’

The Principles for Responsible Investment (PRI) welcomed the Commission’s action plan. 

Nathan Fabian, director of policy and research at the PRI, said: “From the PRI’s perspective, ESG integration and supportive policy environments must go hand in hand.

“It is time for a comprehensive and far-sighted response from policy makers and that is what the Commission appears to be delivering.”

Fabian encouraged all PRI signatories to see the Action Plan as an opportunity to improve the functioning and performance of the financial system in the sustainable service of its beneficiaries and savers.

“We see sustainability as a financial system imperative,” said Fabian.

Fabian was a member of the HLEG that advised the Commission on its sustainable finance strategy.

The PRI previously carried out a study of global regulation, concluding that it sent weak signals about ESG and gave the impression stewardship and ESG integration were optional.

The language around ESG in the IORP II legislation has been described as inconsistent. In some cases provisions are voluntary or only imposed where ESG factors are already considered, but in several instances ESG-related provisions are mandatory.

Francois Barker, partner at law firm Eversheds, has previously said that the law amounted to an “upping of the ante that we haven’t seen before” on ESG.