A government proposal to ease capital requirements for pension funds’ environmental sustainable investments in Sweden’s latest batch of IORP II legislation has been given the thumbs down by the country’s financial watchdog.
In its response to the consultation on draft legislation amending Sweden’s main IORP II act, which came into force at the end of last year, the FSA said: “The proposal that the societal interest in environmentally-sustainable investments should be taken into account in the capital requirement calculation should be recast.
“It is not appropriate to further reduce the capital requirement for such investments until it has been shown that they routinely imply a lower financial risk,” the FSA (Finansinspektionen, FI) said in its written response to the memorandum “En översyn av regleringen för tjänstepensionsföretag” (A review of the regulations for occupational pension companies), which has been out for consultation with a deadline of yesterday.
The memorandum contains several amendments to the main IORP II act, taking account of four parliamentary demands for solutions to contentious aspects of the law – which had been rushed though at the end of last year to avoid EU penalties for lateness.
The memorandum produced by the Financial Markets Department includes the proposal that the capital requirement for market risk included in the risk-sensitive capital requirement should include a subgroup for risk related to “approved infrastructure investments”.
The proposal goes on: “The public interest in achieving environmentally sustainable investments must be taken into account when calculating the capital requirement for approved infrastructure investments.”
The FSA said it endorsed the first part of this proposal, but interpreted the second part as meaning environmental sustainability should be a criterion for approving infrastructure investments – and that the capital requirement for these approved assets should be lowered from the current level.
“FI does not consider that the capital adequacy rules should be adjusted in order to promote goals other than protecting policyholders and safeguarding financial stability, regardless of whether the business is about sustainability or anything else,” the authority wrote.
Capital requirements rules should not be a political instrument, it said, but should be consistent with valuation principles for balance sheets and reflect the real risks faced by occupational pension companies.
“It is therefore not advisable to lower the capital requirement to strengthen the incentives for investment in infrastructure,” the FSA said.
In its consultation response, the authority also singled out two other parts of the draft legislation for criticism, rejecting the idea of reducing risk-sensitive capital requirements by a further adjustment amount, and calling for further investigation into the proposal to allow occupational pension companies’ safety reserves to be included in the capital base.
In December, the governor of Denmark’s central bank, the former ATP chief executive officer Lars Rohde, at the IPE Conference spoke out against the idea of supporting green growth by reducing banks’ capital charges for climate-friendly lending.