German pensions association aba has strongly rejected the European Commission’s proposal to introduce new rules regarding pension funds’ integration of environmental, social and corporate governance (ESG) criteria in investment decision-making.
The Berlin-based industry body said the Commission’s proposal misunderstood or ignored the nature of the EU’s law on workplace pension funds – the IORP II Directive – and apparently also misunderstood the directive’s existing ESG requirements.
Aba’s ire was targeted at the Commission’s proposal for a regulation “on disclosures relating to sustainability investments and sustainability risks”, which includes an amendment of IORP II. It is one of three draft regulations the Commission has proposed on sustainable finance.
It questioned the move to amend the directive when it was currently being transposed into national law by member states. IORP II’s current wording provides for an evaluation and review by 2023.
“We therefore call for an adequate period of time for the member states and, above all, the [pension funds] concerned, first to implement the new rules of the IORP II Directive and then to gather experience before new rules are created,” said aba in a position paper on the Commission’s regulatory proposal.
The Commission’s proposed IORP II amendment would bring in so-called ‘delegated acts’, a type of secondary legislation generally used to establish measures of a technical nature. Unlike EU directives, delegated acts are drafted without the active involvement of the European Parliament or European Council.
Aba contended that delegated acts were an instrument aimed at achieving full harmonisation of rules across the EU, which had been deliberately kept out of the final IORP II Directive to give member states more flexibility in implementing it.
The association added that delegated acts were not suitable for what the Commission had in mind, as it wanted to amend the prudent person rule – “a central component” of IORP II.
Aba also suggested the Commission was misguided in pursuing the delegated act route to achieve “coherence” with other legislation governing areas such as insurance (Solvency II) and investment fund products (UCITS and AIFMD).
Occupational pension funds should not be treated as pure financial service providers and were regularly “on the demand side of the financial market”, aba said, so seeking coherence with EU directives for financial service providers was “neither sensible nor appropriate”.
Paul Tang, the politician leading the European Parliament’s response to the Commission’s draft regulation, has scrapped the insertion of delegated acts into IORP II from his version of the draft legislation, although it includes other proposals for directly amending IORP II.
‘That’s not what IORP II says’
The industry association also suggested the Commission’s proposal was based on an incorrect understanding of the ESG requirements in the IORP II Directive.
In its proposal, the Commission said that it wanted “to specify… the ‘prudent person’ rule with respect to the consideration of [ESG] risks and the inclusion of [ESG] factors in internal investment decisions and risk management processes”.
However, ESG requirements in the IORP II Directive were mainly about disclosure and did not include a requirement to integrate ESG criteria into investment decisions, aba said. There was a requirement for pension funds to cover ESG risks within their risk management, but “this does not mean that IORPs generally have to include ESG criteria in their investment decisions”.
“Apparently the Commission has based its proposals for future IORP regulation on this wrong understanding,” said the industry association. “The proposal for empowering the Commission to issue delegated acts is based on an interpretation of the IORP II Directive that we do not understand.”
Aba’s comment on the Commission’s proposed disclosure regulation can be found here.