The European Commission published its final proposal for revising the EU’s Sustainable Finance Disclosures Regulation (SFDR) last week.
Broadly speaking, the plans have been welcomed by the investment industry.
Tanguy van de Werve, the director-general of the European Fund and Asset Management Association (EFAMA), hailed them as “an advancement toward a sustainable finance framework that is effective in practice”.
They have received notably less praise from civil society, whose members are frustrated with the dilution of reporting requirements on environmental and social harms, and the loose criteria for funds claiming to consider sustainability factors.
“Instead of fixing the weaknesses of the current SFDR, the Commission has stripped away key safeguards that help investors and consumers understand the real-world impact of their investments,” said Isabella Ritter, a senior EU policy officer for campaign group ShareAction.
Pension funds
Pension funds and their membership bodies have been notably quieter since the launch of the final proposal, with many declining to comment for this article because they need more time to consult with members and lawyers.
But what do the plans mean for the industry?
“The good news is that the way these disclosures can be provided is expressly linked to IORP II disclosures and can be done electronically”
Sarah McCague, partner at Arthur Cox
“The big headline is that […] SFDR is going to continue to apply to IORPs, including occupational pension schemes, so all the new changes like the proposed Article 8 and 9 restructure, will affect them too,” explained Sarah McCague, a partner at Irish law firm Arthur Cox.
Pension funds will still be required to disclose their sustainability risk policies and the integration of sustainability risks in pre-contractual disclosures, and to maintain disclosures on sustainability-related financial products.
“The good news is that the way these disclosures can be provided is expressly linked to IORP II disclosures and can be done electronically, on a website or even on paper,” McCague added.
But there are some factors that might make life tricky for pension funds.
Segregated accounts and mandates may be an issue
While financial products are often marketed to retail investors, portfolio management is only available to institutional clients and is therefore excluded from SFDR on the basis that it does not warrant greenwashing protections.
This means asset managers will not have to label their portfolio management activities as sustainable under SFDR in order to describe them as such in their communications.
But it also means that, when IORPs are calculating the overall alignment of their funds with SFDR’s three labels, they can’t include their segregated accounts or mandates – even if they’re dedicated to sustainability.
This will make it harder for pension funds to qualify as ‘sustainable’, because the regime requires 70% of total assets to be aligned with the criteria in order to secure a label.
Sovereign bonds
Another aspect that could be difficult for pension funds is their exposure to sovereign bonds, as government debt is not considered a legitimate contribution to either Article 7 (transition) or Article 9 (sustainability objectives) strategies.
It still has to be included in the denominator when calculating the percentage of alignment, though, unless it is a green bond.
Given the high proportions of sovereign bonds in pension portfolios, this will make it hard for many to hit that 70% threshold, regardless of the sustainability credentials of the rest of their assets.
An exception is made for Article 8 funds (those that simply integrate sustainability considerations), which appear to be permitted to include government debt in their numerator.
The European supervisory authorities previously recommended that the Commission develop a framework to assess the sustainability features of government bonds, an idea that was welcomed by the Dutch pension federation.
The impact of not qualifying
McCague acknowledges that “qualifying for the categories just got a bit tougher”. But, she told IPE, it will not be a game-changer for many.
“In Ireland, we haven’t seen lots of pension funds going for Article 8 or 9 status – even where trustees have a sustainability mandate, their main goal is to provide retirement income, not sustainable investment.”
The impacts will be felt harder in other jurisdictions, though. In the Netherlands, for example, most pension funds covered by SFDR have previously opted to adopt Article 8.
Losing this status under the new regime would prohibit a fund from marketing its strategy as sustainable. And it is this that has caused the greatest consternation.
“We don’t know what qualifies as marketing from a pensions perspective,” said a representative from one pension fund, who asked not to be named.
“The Commission hasn’t explained, and pension funds don’t market to our clients the way other financial market participants do – we’re not trying to sell anyone anything.”
There is a concern that marketing under the SFDR rules could include general communication with members about sustainability topics, meaning pension funds would be banned from discussing their environmental and social efforts on their websites, newsletters and in the media.
Push for a carve-out?
Given the difficulties pension funds would have in aligning with the proposed categories, and the potential for that to prevent them from discussing sustainability altogether, there is likely to be a strengthened call for IORPs to be removed from the regime.
Lobbying is already under way, as the industry seeks to influence the positions of the European Parliament and Council, which are developing their negotiating mandates ahead of next year’s trialogues on the new SFDR.
The Commission did not respond to multiple requests for clarity on the points raised in this article.
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