The information that pension funds provide about how they deal with sustainability risks in their investment policies often lacks detail and sometimes includes contradictory statements, according to a study from financial regulator AFM on the implementation of the Sustainable Finance Disclosure Regulation (SFDR) by pension funds.

AFM surveyed 149 pension funds and seven premium pension institutions – commercial defined contribution (DC) vehicles – for its study.

Pension funds tend to give only brief descriptions about the sustainability risks they identify, and do not make clear how they mitigate these risks. “In some cases, a pension fund only mentions it takes into account sustainability risks, without addressing how this is done in practice,” said AFM.

Pensioenfederatie hails “clear steps forward” in SFDR implementation

The Dutch pensions federation gives a positive spin to the AFM report.

The Pensioenfederatie has acknowledged there is “work to be done”, but noted that at the same time “the sector has made clear steps to implement the SFDR.”

The federation found it “logical” that further steps need to be taken, because the SFDR’s regulatory technical standards have not yet been confirmed.

AFM added that the information about sustainability risks that Dutch pension funds have published on their websites is often hard to understand. “Among other things, this is because pension funds do not give a clear definition of sustainability.”

Pension funds also sometimes contradict themselves. The regulator gave an example of a pension fund that on the one hand said it invests in “sustainable investments that have been classified in accordance with the relevant EU legislation”. However, a couple of pages down the report, the same fund stated it was yet to formulate specific goals for its sustainable investments.

“It is unclear how these two paragraphs relate to each other,” said AFM.

According to the regulator, 93% of Dutch pension savers now participate in a pension arrangement that promotes sustainable characteristics (article 8 of the SFDR).

The number of pension funds that also takes into account the negative effects of their investments on sustainability is lower: only one in three funds accounts for so-called “double materiality”. Because the country’s largest pension schemes are among this minority, these funds together account for 80% of Dutch pension assets.

Both pension funds that do take into account adverse effects on sustainability and those that don’t often fail to sufficiently explain why and how.

“Pension funds that declare they do account for negative effects on sustainability, often do not describe these negative effects, nor define or prioritise them. At the same time, funds that do not account for them also fail to explain this clearly.”

Funds that do provide an explanation tend to point at the lack of sustainability data at the company-level and on the lack of clarity around the SFDR’s regulatory technical standards.

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