Pension funds will be forced to conduct assessments of the climate, resource and environmental risk associated with holdings under proposals outlined in the revised IORP Directive.
The revised Directive offers details on how pension funds should assess risk, stating that they should be required to produce risk evaluations any time there is a “significant” change in the institutions’ risk profile and examine overall funding needs, sponsor support and operational risks.
In what will be viewed as a victory for asset managers including Generation Investment Management and the UK lobby group ShareAction, those subject to new risk-evaluation requirements would also need to place an emphasis on environmental concerns.
Generation IM has previously called on investors to sell all their fossil fuel investments due to the risk of “stranded carbon assets” – essentially the financial risk posed by companies being unable to exploit carbon-heavy natural resources due to greenhouse gas reduction targets.
The Directive calls for a “qualitative assessment of new or emerging risks relating to climate change, use of resources and the environment”.
Caroline Escott, head of government relations at UKSIF, said the risks to investment from climate and environmental trends were “material”.
“Responsible investors have long led the way in incorporating ‘stranded asset’ issues into their thinking, and the Commission’s proposals appear to be a positive step towards providing EU countries with the sustained economic recovery they desperately need,” she said.
“It is particularly vital for pension funds as significant asset owners to lead the way and use their purchasing power to effectively channel the funds in ways that protects value and drives a more sustainable economy.”
ShareAction chief executive Catherine Howarth also welcomed the move.
“If the European Commission is taking steps to make pension funds evaluate and manage these risks carefully in the interests of the future income and security of European pension savers, it is an important development and one that we welcome,” she said.
Responsibility to specify the elements covered by the new risk evaluation system will fall to the European Commission, which, through a forthcoming delegated act, will instruct the European Insurance and Occupational Pensions Authority to draw up the required technical standards.
However, in a seeming admission that the introduction of solvency requirements could only occur through a further revision of IORP, Article 30 of the Directive stated that the delegated act would not seek to impose “additional funding requirements beyond those foreseen in this Directive” – potentially a recognition of the industry’s fears that EIOPA could introduce solvency requirements through the “back door”.
The Commission has scheduled to review IORP II four years after its implementation to “assess in particular the application of the rules regarding the calculation of the technical provisions, the funding of technical provisions, regulatory own funds, solvency margins, investment rules and any other aspect relating to the financial solvency situation of the insitution”.