The European Parliament has backed the introduction of the Institutions for Occupational Retirement Provision Directive (IORPII). One of the requirements of the new directive is for European occupational pensions to consider environmental, social and governance (ESG) issues.

Responsible investment group ShareAction has welcomed the EP's support for the directive which was passed last week following an agreement in the summer with the other EU institutions - the European Union and the European Council - on a number of amendments to the Commission's original 2014 draft. This final parliamentary approval means member states now have two years to transpose IORP II's measures into national law.

ShareAction said these are the strongest and clearest requirements on ESG issues yet seen in an EU text. The campaigning group said it engaged extensively with  MEPs, Commission officials and European Council Representatives in favour of this provision, together with civil society allies in Europe.

Catherine Howarth, ShareAction chief executive, said: “This is a landmark moment for responsible investment in Europe. European policymakers are to be applauded for their bold action in not only recognising the clear financial risks posed by ESG factors, but also for mandating European pension funds to act on them.”

Sebastien Godinot, economist in the conservation charity, WWF’s European Policy Office, added: “The progress made in the IORPs directive is a breakthrough . It sets a precedent that must be replicated and deepened in several other relevant EU legislations like the Shareholder Rights Directive, to ensure that obstacles to mainstreaming sustainable finance are quickly removed.”

However, ShareAction has called on the UK government to ensure that the protections given to European savers by the EU's  are extended to British people despite the decision to leave the EU. While the UK's EU membership continues it has the same rights and obligations as others but ShareAction said that it is not clear whether the UK will continue to transpose new EU legislation.

Howarth said: “We urge the UK government to clarify its intentions and to transpose the parts of the text on ESG and transparency, and members’ rights to information. UK savers should have the same protection and rights to information as savers on the continent – not least because increasing numbers of UK savers bear the risks attached to investments themselves.”

A European Parliament briefing produced in preparation for the vote shows that the UK will be the most affected by the directive because of the size of its occupational pensions market. The paper indicated that while  IORPs hold assets worth €2.5 trillion on behalf of around 75 million Europeans, which represents 20% of the EU’s working-age population these are disproportionately held in the UK (55.9% of IORP assets) and the Netherlands (30.7%).  Around a further 10% of IORP assets are in Germany (4.5%), Italy (2.8%) and Ireland (2.4%).

IORPII ESG Texts

(41a) Environmental, social and governance factors as referred to in the UN Principles for Responsible Investment are important for the investment policy and risk management systems of IORPs. Member States should require IORPs to explicitly disclose where these factors are considered in investment decisions and how they are part of their risk management system. The relevance and materiality of environmental, social and governance factors to a scheme’s investments and how they are taken into account should be part of the information provided by the scheme under this Directive. This does not preclude a scheme from satisfying the requirement by stating in such information that environmental, social and governance factors are not considered in its investment policy, or that the costs of a monitoring system are disproportionate to the nature, scale and complexity of their activities.

(aa) Within the ‘prudent person’ rule, Member States shall allow IORPs to take into account the potential long-term impact of investment decisions on environmental, social, and governance factors;

(h)where environmental, social and governance factors are considered in investment decisions, an assessment of new or emerging risks, including risks related to climate change, use of resources and the environment, social risks and risks related to the depreciation of assets due to regulatory change.

Article 32 Statement of investment policy principles: Member States shall ensure that every IORP registered or authorised in their territories prepares and, at least every three years, reviews a written statement of investment-policy principles........and how the investment policy takes environmental, social and governance factors into account. The statement shall be made publicly available

Article 55 Information to be given to prospective members: (c) information on whether and how environmental, climate, social and corporate governance factors are considered in the investment approach.