PensionsEurope has urged the EU to rethink its plans for the Sustainable Finance Disclosures Regulation (SFDR), insisting that none of the options currently on the table are suitable for pension funds.
The law is intended to stop greenwashing by increasing transparency around investment products being marketed as sustainable.
The European Commission is expected to replace the existing vague framework with a more robust categorisation regime, in a bid to prevent the regulation from being misused as an EU label.
But PensionsEurope argued that a one-size-fits-all regime will put pension funds at a disadvantage, because it is being designed primarily with retail investors in mind.
The lobbying group pointed out that pension funds are generally invested in more complex asset classes than retail funds, and need to consider longer-term risks.
“This long-term risk horizon naturally requires them to take into account risks that could impact portfolio performance over time,” it said in a new position paper on the future of SFDR.
“Among these, ESG risks – particularly those related to climate change – have become increasingly important in their risk management strategies.”
As a result, many pension funds have adopted net zero targets, in addition to exclusions aligned with the values of their members.
But SFDR prohibits investors from telling their clients or savers that products are sustainable unless they meet certain criteria, which are likely to be strengthened when the regulation becomes a categorisation scheme.
PensionsEurope noted that, while that approach may be suitable to protect retail investors from being mis-sold funds by asset managers, most pension beneficiaries don’t get to choose their funds.
There was division among the body’s members about whether Institutions for Occupational Retirement Provision (IORPs) should be included at all under SFDR, but broad consensus that they should not be prohibited from explaining their sustainability approach on their websites or other non-regulatory channels, even if they don’t meet the SFDR’s criteria.
“Banning pension funds from disclosing sustainability information poses significant reputational risks and should be avoided,” said PensionsEurope, adding that the SFDR review should “explicitly enable” such communication.
It argued that “none of the three approaches currently under discussion appears to be a sound approach which takes into account the characteristics of IORPs or enables them to communicate effectively about their sustainability ambitions”.
As a result, PensionEurope reiterated its call for IORP-specific rules under SFDR.
It said these rules should be flexible, so that member states and their supervisors can adjust them to fit the national context. They should permit IORPs to align voluntarily with SFDR’s proposed categories and disclose principal adverse impacts that make sense for pension funds.
On Monday, the European Supervisory Authorities updated their consolidated Q&As for SFDR, clarifying how to interpret requirements including some indicators linked to water usage and energy consumption, and providing more guidance on how to calculate investments.
