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Pension funds ‘should consult members on ESG preferences’: HLEG

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Pension funds should consult their beneficiaries on their sustainability preferences and reflect those in their investment decision-making – regardless of whether or not they are financially material, according to the group advising the European Commission on sustainable finance. 

The recommendation is one of several included in the final report from the high-profile High Level Expert Group (HLEG) on sustainable finance, a copy of which IPE has seen.

In the report, due to be published tomorrow, the HLEG states: “Whether financially material or not, the preferences of clients, members and beneficiaries shall be proactively sought and incorporated into investors’ investment decision-making and the demands that they, in turn, make on the asset managers and other participants with which they interact to deliver their obligations to clients.”

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

In its final report – which reflects feedback from an interim version published in July last year – the group presents eight priority recommendations or actions (including the above statement), five cross-cutting recommendations, and recommendations for specific sectors of the financial system.

“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” 

HLEG on sustainable finance final report

The HLEG was established by, and has the ear of, the Commission, which is developing an action plan on sustainable finance that will build on its recommendations.

In a sector-specific recommendation for pension funds, 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.”

The recommendation is likely to have a mixed reception among European pension funds. In responses to a Commission consultation following up on some of the HLEG’s early recommendations, some occupational pension fund associations said they were against a requirement to consult beneficiaries about their ESG preferences.

The HLEG notes that IORPs are required to inform prospective members whether and how ESG factors are considered in their investment approach.

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”.

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“This would be in recognition of the new landscape of sustainability risks and opportunities and also be in the interest of sustained long-term performance,” the report says.

Although not formalised as recommendation, the HLEG report also says that the European pension fund supervisor, EIOPA, would need to build expertise on including sustainability and governance factors into risk assessment. The Commission has proposed that EIOPA and the other European supervisory authorities (ESAs) take sustainability considerations into account as part of their work.

“The group believes that the recommendations presented in this report provide the framework for further action,” the HLEG states. ”The result will be a more sustainable and inclusive Europe, which is able to provide prosperity for its citizens without compromising the ability of future generations to meet their own needs.

“It is important to note that the implementation shall not augment the regulatory burden and complexity but facilitate more investments.” 

‘Manifesto for far-reaching change’

The European Commission was positive about the HLEG’s final output, with vice-presidents Valdis Dombrovskis and Jyrki Katainen describing it 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.”

The priority actions the HLEG has recommended are to:

  • 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.

 

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Readers' comments (1)

  • Not sure a requirement to consult members on ESG preferences is a good idea in common-law jurisdictions. Doesn't it amount to trustees delegating THEIR decision-making duty to a survey? If the purpose of the trust is to provide financial benefits, common-law already dictates that fiduciaries ought to be making rational decisions that factor in ESG considerations that are relevant to financial risks and opportunities. Where reliable ESG information is available, they ignore it at their peril.

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