PensionsEurope has laid into policymakers’ plan to require its members to comply with a new version of the Sustainable Finance Disclosure Regulation (SFDR).
The trade body published its official position on the European Commission’s legislative proposal on Thursday, hot on the heels of opinions from Pensioenfederatie and the European Fund and Asset Management Association.
The Commission wants to introduce three categories into SFDR, aimed at investment products seeking to market themselves as having environmental or social credentials.
At least 70% of a portfolio would have to be allocated to eligible assets in order to qualify for one of the categories: ‘ESG Basics’, ‘Transition’ and ‘Sustainable’.
Not qualifying would trigger a ban on communicating widely about sustainability issues.
PensionsEurope described the potential revisions as “a structural misfit for IORPs” or Institutions for Occupational Retirement Provision.
“SFDR is largely built around the assumption of an informed consumer investor who may use disclosures to make singular investment choices,” it said.
“Pension scheme members are – by definition – part of a collective process and cannot execute personal investment preferences on a level that is comparable with private retail products.”
Many employer-sponsored and statutory funds in Central and Eastern European countries are also incompatible with the proposed regime, PensionsEurope argued.
It added that the category-based framework “risks placing pension funds systematically in the lowest sustainability categories, or outside sustainability-related categories altogether”.
This is partly because lots of pension funds are treated as a single financial product under SFDR, and their allocation to asset classes such as sovereign bonds is likely to prevent them from meeting the 70% threshold needed to qualify for the Sustainability or Transition categories.
Instead, they are expected to opt for the least ambitious label - ‘ESG Basics’ – or none at all.
“This outcome would not be the result of weak sustainability practices, but rather by the very structural features that distinguish IORP from private retail products: collective long-term approach, based on diversified portfolios, liability-driven investment strategies and significant allocations to government bonds.”
To tackle the problem, PensionsEurope called on the legislators to give national governments discretion over how SFDR should apply to pension funds in their countries.
“At a minimum, member states should decide whether pension schemes operated by IORPs are considered ‘financial products’ under SFDR,” it argued, adding that governments could excuse funds from the regime if they don’t ‘market’ to clients.
Giving countries this kind of decision-making power would be an exceptional move, because SFDR is a regulation – meaning it is designed to apply universally to all member states.
Directives, on the other hand, give plenty of implementing powers to domestic governments.
If lawmakers won’t allow national discretion, PensionsEurope says “excluding IORPs from any mandatory SFDR categorisation system would be a proportionate and appropriate approach”.
It’s third-best option is to develop a “dedicated, IORP-specific regulatory technical standard”.
Pensioenfederatie, the Dutch pension body, also raised concerns about the compatibility of the planned SFDR framework with occupational schemes in the Netherlands. However, it didn’t go as far as PensionsEurope: instead, it asked for a number of major reforms to the proposals.
