A trio of pension fund associations have advised the European Commission against taking a prescriptive approach to the consideration of environmental, social, or governance (ESG) factors by pension funds.

Dutch and German bodies along with the Europe-wide representative association agreed that relevant investment entities should consider sustainability factors in their investment decision-making, but argued that decisions related to sustainability should be left to the pension funds rather than prescribed by law.

The industry bodies were responding to a Commission consultation on “institutional investors’ and asset managers’ duties regarding sustainability”, launched following recommendations from the High Level Expert Group (HLEG) on sustainable finance.

This group is expected to publish its final report on Wednesday.

PensionsEurope, the European umbrella body for occupational pension funds, aba, the German occupational pension fund association, and Pensioenfederatie, the equivalent Dutch body, submitted responses to the Commission’s consultation.

The European Commission

Developing an overarching EU strategy on sustainable finance is part of the Commission’s Capital Markets Union project

aba’s response was the most strongly worded.

It said it “strongly argues against an EU-wide definition of specific ESG filtering criteria” because “the ultimate choice of criteria is heavily influenced by individual values and moral concepts”.

“Determining how ESG goals can best be achieved should be left up to the [pension funds],” added aba.

“aba opposes any obligation for IORPs to include ESG criteria in business or investment decisions.”

aba, Germany’s occupational pension fund association

aba added that a universally shared EU-wide understanding of ESG was “inconceivable”.

“Accordingly, a fixed definition or predefined catalogue would not be a viable solution,” it said.

Elsewhere in the consultation, aba said it was against any obligation for IORPs – occupational pension funds in the language of the European Union – to include ESG criteria in business or investment decisions.

“Setting ESG objectives should remain voluntary,” it said.

PensionsEurope, meanwhile, said that pension funds would increasingly need to address societal expectations on responsible investment, but that “a prescriptive, mandatory approach would not be able to take account of [the] diversity of existing approaches”.

“There should be room for pension funds to prioritise and focus on specific sustainability issues in their investment decision-making,” it added.

If any legislation were to be introduced at the EU level, pension funds would strongly prefer principles-based rules without reliance on delegated and implementing acts, it said.

The Dutch Pension Federation said it would not be desirable if detailed rules were developed at the European level in the area of sustainability and ESG factors.

“We do not believe in prescriptive measures set by the EU,” it said.

It also said both the Dutch government and the pension sector paid a lot of attention to this subject. Considering sustainability was compatible with delivering a good pension to members, which was paramount for pension funds, the federation said. Also, in the Netherlands it was already mandatory for pension funds to report on how they take account of the environment, climate, human rights and social relations in their investment policy.

“We do not believe in prescriptive measures set by the EU.”

Dutch Pensions Federation

PensionsEurope made a similar point, noting that in its view the “modern” understanding of fiduciary duty did not prevent pension funds from addressing sustainability risks where these were considered to pose material financial risks.

It said the revised IORP Directive clarified that Member States should allow pension funds to take into account the potential long-term impact of investment decisions on ESG factors within the prudent person rule.

In its introduction to the consultation, the Commission said the duties of care, loyalty and prudence were embedded in the EU financial legal framework, but it appeared unclear that they required institutional investors and asset managers to assess the materiality of sustainability risks.

Its consultation was intended to help the Commission “gather and analyse the necessary evidence to determine possible action to improve the assessment and integration of sustainability factors in the relevant investment entities’ decision-making process”.

Disagreement over beneficiary input

There was a clear difference of opinion among the three associations over the question of the role of beneficiaries in influencing pension funds’ practice with respect to responsible investment, with PensionsEurope and aba against a requirement to consult members. The Dutch Pensions Federation was in favour.

PensionsEurope said that some pension funds consulted beneficiaries regarding their preferences, but “we strongly feel that these initiatives should not be required by EU regulation but remain voluntary or fall under national requirements”.

aba said that the primary goal of any IORP was to continuously fulfil and meet the expected or promised [pension] benefit by choosing an adequate, risk-controlled investment policy. ESG criteria were only one factor to be considered within the investment process, with the sponsor’s own ESG policy also informing this.

“aba therefore opposes yearly or semi-annual surveys among beneficiaries and their preferences regarding ESG,” the association said. “This would hardly be achievable at reasonable cost.”

According to the Dutch Pension Federation, however, pension providers should consult their beneficiaries in relation to sustainability issues because they “should know what their beneficiaries find important”.