The European Insurance and Occupational Pensions Authority (EIOPA) has voiced its support for calls to improve environmental, social and governance (ESG) integration and reporting for pension providers in a response to the European Commission’s Renewed Sustainable Finance Strategy consultation.

In particular, the group highlighted that whilst the current IORP II directive requires schemes to take into account ESG factors and risks in many areas, such as the system of governance, the investment policy, and the risk-management system, it does not consider the Prudent Person Rule (PPR).

EIOPA stated that the national competent authorities (NCAs) 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 noted that, within this context, a further improvement of ESG integration would be to mandate considerations around the long-term impact of their investment decisions on ESG factors within the PPR.

This could be done by amending the provision of Art.19 of IORP II without prejudice to the objective of providing occupational retirement benefits, also having regard to the principle of proportionality, the group explained.

EIOPA suggested that in assessing IROPs’ compliance with PPR, national competent authorities (NCA) should also review the relevance & financial materiality of incorporating ESG factors in the investment policy, if applied by the IORP, and the IORPs’ explanation of how the inclusion of ESG factors complies with the PPR.

More generally, the group stated that “any proactive approach” with respect to IORPs should be in line with the aim of providing occupational retirement benefits and complying with the prudential requirements as set out in the IORP II directive.

EIOPA added that, besides considering the impact of ESG risks on the insurance company or pension fund, it was of the view that it is relevant to consider the impact an insurer or pension fund can have on environmental or social factors, through its investment or, for insurers, underwriting decisions.

It suggested for the prudent person principle in Solvency II be complemented with the requirement for undertakings to assess the potential long-term impact of their investments on sustainability factors.

The group explained that the stewardship approach of pension funds is an “essential element for acting on negative externalities”, noting that this may include active engagement with investees to achieve sustainable investment outcomes through voting strategies, for example.

EIOPA also highlighted the development of ‘cooperation platforms’, where experienced IORPs can share their best practice, and encouraging IORPs of similar types, or with similar ESG objectives, to ‘team up’ and form partnerships to influence investee companies, as potential initiatives which could strengthen IORPs stewardship role.

The group stated: “There is a role for competent authorities/EIOPA and pensions funds' associations to encourage and possibly facilitate the development of these platforms / partnerships.

“Large IORPs are more likely to influence investee companies. For small- and medium-sized IORPs it is a challenging, if not impossible task: in other words size matters.

“Initiatives such as a taskforce or consortium bringing together IORPs with common interests / objectives to influence investee companies or regrouping ESG knowledge/practices, can be encouraged.”

The group also supported calls for the EU to further improve the integration of members’ and beneficiaries’ ESG preferences in the investment strategies and the management and governance of IORPs, stating that this can improve member engagement with the scheme, and retirement planning more broadly.

It explained that membership structure might drive some ESG considerations, as PPR compliance necessitates an investment policy geared to the membership structure, also noting that gauging members’ ESG preferences is essential for justifying the integration of ESG factors, in particular for non-financial (e.g. ethical) reasons.

The group added that mandating IORPs to consider the potential long-term impact of their investment decisions on ESG factors would require further consideration on how IORPs integrate members’ ESG preferences in relation to PPR compliance.

However, considering IORPs are collective schemes with members who may have different view on ESG integration, it noted that this “may be more challenging” and suggested that schemes could instead focus on formulating a consistent set of ESG preferences.

“For instance,” the report explained, “Defined contribution (DC) IORPs could adopt a target date fund approach with variable ESG preferences by cohorts, develop a method (e.g. fuzzy multicriteria decision-making) to integrate multiple ESG criteria or integrate behavioural research (e.g. social norm) to formulate consistent ESG preferences."

However, the group clarified that IORPs should retain flexibility on how to gauge and articulate these preferences in the investment policy, with regard to the proportionality principle.

The group also support the EU establishing a label for investment funds, such as ESG funds or green funds aimed at professional investors, provided there is also a demand from institutional investors.

It emphasised however, that this should not lead to lower standards of due diligence by professional investors, or inhibit innovation ins sustainable finance products.

The group explained that the establishment of specific business to business sustainable labels for investment funds could help institutional investors, such as pension schemes, to review and asses the consistency and reliability of investment funds.

In particular, it highlighted the use of labels as especially helpful for institutional investors that lack specialised ESG investing resources, stating that this could ultimately encourage them to expand their green investments, such as in pension schemes.

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