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EIOPA opinion on ESG misrepresents IORP II, says PensionsEurope [updated]

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New EIOPA guidance for national supervisors relating to ESG-related provisions in IORP II misrepresents the legal framework set by the directive, according to PensionsEurope.

The Brussels-based industry association made the comment in a response to a batch of IORP II opinions published by the EU authority earlier this week, to help national pension supervisors in the implementation of the IORP II directive.

The opinions cover different areas of the new pension fund legislation, including a requirement for an own risk assessment (ORA) and provisions relating to environmental, social and corporate governance (ESG) matters.

According to PensionsEurope, the opinion on the latter “misrepresents the legal framework set by IORP II by indicating that IORPs are required to take ESG factors into consideration as part of the investment policy”.

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The association noted that Article 19 of the directive only requires that member states do not prohibit the consideration of investment decisions’ impact on ESG factors.

In addition, the legislation, in point 58 of the recital, explicitly mentioned that IORPs could opt out of incorporating ESG factors in investment decisions, which PensionsEurope said was not mentioned at all in EIOPA’s opinion.

Impact investing push

The industry association also said the opinion urges national supervisors to push pension funds towards impact investing, and that this was wrong.

Although there were pension funds that wanted to make a positive societal impact, any societal objectives “should not be forced upon pension funds by supervisors”.

PensionsEurope was referring to EIOPA stating in the opinion that national supervisors “should encourage IORPs to take into account the potential long-term impact of investment decisions on ESG factors in order to support society’s sustainability goals”.

It remains up to the pension fund to decide whether the incorporation of ESG factors leads to better risk-adjust[ed] returns

Matti Leppälä, secretary general of PensionsEurope

Matti Leppälä, secretary general of PensionsEurope, added: “If you invest for the long run like a pension fund, ESG risks like climate change should receive attention as part of risk management.

“However, it remains up to the pension fund to decide whether the incorporation of ESG factors leads to better risk-adjust[ed] returns.”

The association said it supported the EU’s sustainable finance agenda and that an increasing number of pension funds had a responsible investment policy, but that it took issue with EIOPA’s opinion on ESG risks for the aforementioned reasons.

What EIOPA says

Introducing the opinion, EIOPA had said national supervisors should “take a holistic view of pension funds’ exposure to ESG risks” and that the document provided “an illustrative mapping of how ESG risks may arise in traditional prudential risks”.

“As institutions tasked with a social purpose of providing retirement benefits, European pension funds should be exemplary leaders of responsible ownership,” it said.

“Thus, [national competent authorities] should encourage pension funds to consider the impact of their long-term investment decisions and activities on ESG factors through their stewardship role, as well as having regard to the impact of sustainability risks on pension fund liabilities.”

Approached for comment about PensionsEurope’s views, a spokesperson for EIOPA said it “continuously engages in dialogue with all its stakeholders also with PensionsEurope, [which is] also represented in EIOPA’s Occupational Pensions Stakeholder Group.”

EIOPA considered and took into account feedback in various forms, the spokesperson continued, but ultimate decisions were taken independently by EIOPA’s board of supervisors, which in this case unanimously adopted all four of EIOPA’s opinions.

PensionsEurope also objected to the opinions on the grounds that they did not recognise the “minimum harmonisation” nature of the directive, and that they were based on a harmonised framework for risk assessment that was rejected by lawmakers when IORP II was being finalised. (See separate article)

This article was updated to add the comment from the EIOPA spokesperson and the box below

Who says what 

In arguing that EIOPA’s opinion misrepresents the IORP II legal framework PensionsEurope is referring to a particular description of the legislation by EIOPA towards the beginning of its document, which reads as follows:

2.1. The IORP II Directive requires IORPs to take into consideration environmental, social and governance (ESG) factors and risks in the following areas:

  • the system of governance, as set out in Article 21;
  • investment policy, as set out in Articles 19 and 30;
  • the risk-management system and the own-risk assessment, as set out in Articles 25 and 28;
  • information to be provided to prospective members, as set out in Article 41.

Article 19 (1) (b) of the IORP II directive itself states:

(b) within the prudent person rule, Member States shall allow IORPs to take into account the potential long-term impact of investment decisions on environmental, social, and governance factors

PensionsEurope also refers to part of the introduction to the IORP II directive (Recital 58), which refers to IORPs being able to fulfil a ESG communication requirement by stating that ESG factors are not considered in the investment policy. 

Further down in its opinion, EIOPA writes that IORPs “may” want to take into account the long-term impact of their investment decisions on ESG factors, in accordance with Article 19.

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