EU Policymakers Agree ESG Requirements for IORPs

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ShareAction has revealed that European policymakers have reached an agreement over the Institutions for Occupational Retirement Provision (IORP) Directive. ShareAction, a responsible investment charity, is thrilled that the new policy sets out clear environmental, social and governance (ESG) requirements for IORPs.

The Directive covers the European occupational pensions market, which invests over €3.2 trillion on behalf of some 75 million Europeans, currently including UK schemes.

Efforts to include ESG issues in the text were initially resisted by the European Parliament and the European Council. The fact that both have changed their minds is a hugely encouraging signal that policymakers are starting to recognise the importance of Responsible Investment issues for savers, the economy and the environment.

The Commission released a proposal to revise the Directive in March 2014, citing the need for stronger governance requirements as a key reason for reform, particularly as more and more savers now have defined contribution pensions which means they bear investment risks themselves. The Commission proposal said that IORPs should evaluate risks relating to ‘climate change, use of resources and the environment’. This requirement was deleted in the initial responses from the co-legislators. But now all have agreed that IORPs should consider ESG risks, and risks relating to stranded assets, and to disclose how they do this in their statement of investment principles.

ShareAction, along with numerous civil society allies, is proud to have played a crucial role in convincing policymakers to change their minds. ShareAction coordinated a letter from 11 civil society organisations to relevant MEPs last year, and another letter from 13 organisations went to representatives from each member state participating in the Council in February this year.

The compromise text of the Directive, agreed on after tense Trialogue negotiations that continued into the early hours of the morning, must still be ratified by the European Parliament and then transposed into national law in the member states. ShareAction will urge the UK government to introduce similar requirements to protect UK savers’ pensions, regardless of whether the Directive will now be implemented in the UK.

The case to include consideration of ESG risks was boosted by a backdrop of increasing evidence that these issues can be financially material.  The role of investment in achieving ambitious global agreements reached on tackling climate change and sustainable development in 2015 was also a factor. Full implementation of the Paris Climate agreement will require an estimated $13.5 trillion of investment in energy efficiency and low carbon; the Sustainable Development goals will require an estimated $5-7 trillion of investment per year. Institutional Investors, including pension funds, have a key role to play in delivering these.

Camilla de Ste Croix, Senior Policy Officer at ShareAction said: “We are delighted that the IORPs text not only requires pension funds to consider environmental issues, as the Commission proposed, but also social and governance issues.  We saw this Directive as a key litmus test on EU policymakers’ appetite for action on building a sustainable economy and Capital Markets Union following the Paris agreement. We hope and expect this outcome will have a positive effect on the development of Responsible Investment in the EU and beyond.”

Catherine Howarth, Chief Executive at ShareAction said: “This is a positive step forward for Responsible Investment in Europe. We at ShareAction are delighted to have played a significant role in securing these far-reaching amendments. They will help make sure that Europeans have their retirement assets properly stewarded to protect their value over the long-term.”