EIOPA Opinion On ESG Misrepresents IORP II, Says PensionsEurope

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New EIOPA guidance for national supervisors relating to ESG-related provisions in IORP II misrepresents the legal framework set by the directive, according to PensionsEurope.

The Brussels-based industry association made the comment in a response to a batch of IORP II opinions published by the EU authority earlier this week, to help national pension supervisors in the implementation of the IORP II directive.

The opinions cover different areas of the new pension fund legislation, including a requirement for an own risk assessment (ORA) and provisions relating to environmental, social and corporate governance (ESG) matters.

According to PensionsEurope, the opinion on the latter “misrepresents the legal framework set by IORP II by indicating that IORPs are required to take ESG factors into consideration as part of the investment policy”.

The association noted that Article 19 of the directive only requires that member states do not prohibit the consideration of investment decisions’ impact on ESG factors.

In addition, the legislation, in point 58 of the recital, explicitly mentioned that IORPs could opt out of incorporating ESG factors in investment decisions, which PensionsEurope said was not mentioned at all in EIOPA’s opinion.

Impact investing push

The industry association also said the opinion urges national supervisors to push pension funds towards impact investing, and that this was wrong.

Although there were pension funds that wanted to make a positive societal impact, any societal objectives “should not be forced upon pension funds by supervisors”.

PensionsEurope was referring to EIOPA stating in the opinion that national supervisors “should encourage IORPs to take into account the potential long-term impact of investment decisions on ESG factors in order to support society’s sustainability goals”.

It remains up to the pension fund to decide whether the incorporation of ESG factors leads to better risk-adjust[ed] returns

Matti Leppälä, secretary general of PensionsEurope

Matti Leppälä, secretary general of PensionsEurope, added: “If you invest for the long run like a pension fund, ESG risks like climate change should receive attention as part of risk management.

“However, it remains up to the pension fund to decide whether the incorporation of ESG factors leads to better risk-adjust[ed] returns.”

The association said it supported the EU’s sustainable finance agenda and that an increasing number of pension funds had a responsible investment policy, but that it took issue with EIOPA’s opinion on ESG risks for the aforementioned reasons.

Introducing the opinion, EIOPA had national supervisors should “take a holistic view of pension funds’ exposure to ESG risks” and that the document provided “an illustrative mapping of how ESG risks may arise in traditional prudential risks”.

“As institutions tasked with a social purpose of providing retirement benefits, European pension funds should be exemplary leaders of responsible ownership,” it said.

“Thus, [national competent authorities] should encourage pension funds to consider the impact of their long-term investment decisions and activities on ESG factors through their stewardship role, as well as having regard to the impact of sustainability risks on pension fund liabilities.”

PensionsEurope also objected to the opinions on the grounds that they did not recognise the “minimum harmonisation” nature of the directive, and that they were based on a harmonised framework for risk assessment that was rejected by lawmakers when IORP II was being finalised. (See separate article)

EIOPA has been approached for comment.