Pension fund associations have warned the European Commission not to take a prescriptive approach to the consideration of environmental, social, or governance (ESG) factors by institutional investors.

Dutch and German bodies along with the Europe-wide representative association PensionsEurope agreed, that pension funds and managers should consider sustainability factors in their investment decision-making, but argue that decisions related to sustainability should be left to the pension funds rather than prescribed by law.

In late January the Commission’s High Level Expert Group (HLEG) on sustainable finance published its final report. The Commission’s upcoming action plan will be built on the recommendations of the group.

Matti Leppälä, CEO of PensionsEurope, said the final report set out a vision for a more sustainable financial system that aligned capital with the broader values of society.

Some of its recommendations could widen the choice of sustainable investments and create a common language for the markets through an agreed ESG classification, or “taxonomy”, supporting pension funds, he said. 

“At the same time,” Leppälä added, “there are countless different ways in which pension funds do responsible investments, depending on national traditions, the type and size of the fund, the position of the sponsoring company and the role of the social partners.

“The EU should stay clear of any prescriptive one-size-fits-all approach. The number of pension funds that choose to proactively invest according to ESG criteria is growing and will continue to do so.”

In its response to the Commission’s consultation on investors’ duties regarding sustainability, aba, the German occupational pension fund association, declared that it opposed “an EU-wide definition of specific ESG filtering criteria” because “the ultimate choice of criteria is heavily influenced by individual values and moral concepts”.

Aba added that a universally shared EU-wide understanding of ESG was “inconceivable”.

Sustainability gains ground

• High Level Expert Group has recommended several measures to improve ESG policies.
• Pension scheme members should get more say on ESG policies.
• Dutch, German and European bodies have given mixed reviews of the ideas.

Consulting members

The HLEG also recommended that pension funds seek greater input from members regarding ESG policies and take these views into account during investment decision-making, regardless of whether or not they are financially material. 

The section of the report referred repeatedly to “asset owners and intermediaries”, implying that the recommendations should apply to investment consultants as well as pension funds.

“The EU should stay clear of any prescriptive one-size-fits-all approach”

Matti Leppälä, PensionsEurope

The HLEG adds: “It can be argued that those who manage money on behalf of others, including pension funds, have an obligation to consult their beneficiaries on their sustainability preferences and subsequently include such considerations in their investment strategies, if such is the preference of their beneficiaries.”

PensionsEurope and aba both opposed this idea, but the Dutch Pensioensfederatie supported it.

PensionsEurope said that some pension funds consulted beneficiaries regarding their preferences, but “we strongly feel that these initiatives should not be required by EU regulation but remain voluntary or fall under national requirements”.

The Dutch body argued that pension providers should consult their beneficiaries in relation to sustainability issues because they “should know what their beneficiaries find important”.

Magnus Billing, CEO of Sweden’s Alecta and a member of the HLEG, told IPE that such consultations should not be seen as “a big ask”.

“I think it’s a reasonable ask for anyone managing other people’s money to try to do that in a way which is in line with what the interest of that beneficiary is,” said Billing. “If you feel that that is a big ask I think you have an issue with your service.”

A second HLEG recommendation for the pension fund industry is to explore initiatives to improve ESG integration and reporting “above and beyond what is currently required in regulation”.

Industry voices

The Institutional Investor Group on Climate Change (IIGCC) said it fully supported the report’s recommendations – in particular, steps to support the clarification of investor duties, to establish an EU sustainability taxonomy, and to confront short-termism in financial markets.

Stephanie Pfeifer, CEO of IIGCC, said: “For the financial sector to respond effectively to the climate challenge, the EU must signal clear direction and expectations across all economic sectors via an overarching and comprehensive roadmap for sustainable finance which pulls in the same direction as the EU’s 2030 Climate and Energy Package and commitments to the Paris Agreement.”

European Commission vice-presidents Valdis Dombrovskis and Jyrki Katainen described the HLEG’s final report as “a manifesto for far-reaching change”.

“Its recommendations show a way towards a financial sector that supports a more sustainable and inclusive economic system, in line with the EU’s environmental and social objectives,” they added. 

“The report is globally relevant, and we encourage other countries to make use of the recommendations to inform their own policy choices and help build sustainable finance at the international level.”

‘Manifesto for far-reaching change’

The HLEG’s primary recommendations:

• Introduce a classification system to establish market clarity on what is green or sustainable, starting with climate change.

• Clarify investor duties “to extend time horizons and bring greater focus on ESG factors”. Requiring consent on sustainability issues within institutional client relationships is essential, according to the HLEG.

• Upgrade disclosure rules to make climate change risks and opportunities fully transparent.

• “Empower and connect Europe’s citizens with sustainable finance issues”, via better access to information on sustainability performance and improving financial literacy.

• Develop official European sustainable finance standards with green bonds.

• Establish a facility – Sustainable Infrastructure Europe – to expand the size and quality of the EU pipeline of sustainable assets. “An at-scale solution is needed where existing public institutions and initiatives are used with maximum effect,” the HLEG said.

• Reform the governance and leadership of companies to build sustainable finance competencies.
Strengthening director duties and stewardship principles were recommended as steps in that direction.

• Enlarge the role and capabilities of the ESAs to promote sustainable finance as part of their mandates.