The European Parliament approved revised rules for workplace retirement plans, including a requirement to adopt environmental, social and governance policy and risk management frameworks.
A revised text of the European pension directive, Institutions for Occupational Retirement Provision II, passed 512-77 with 40 abstentions.
The directive covers European workplace retirement plans, a market of around 125,000 plans with €2.5 trillion ($2.7 trillion) invested on behalf of about 20% of the European workforce.
Among the rules is a requirement for every major workplace plan in Europe to adopt an ESG framework. A spokeswoman said member states have 18 months to codify the rules into national law.
Environmental, social and governance factors “are important for the investment policy and risks management systems of IORPs,” said the approved text, published on the European Parliament's website Thursday. “IORPs should, as part of their risk management system, produce a risk assessment for their activities relating to pensions. That risk assessment should also be made available to the competent authorities and should, where relevant, include … risks related to climate change, use of resources, the environment, social risks and risks related to the depreciation of assets due to regulatory change,” known as stranded assets.
The move was welcomed by sources in the retirement industry. “Aging populations and greater burdens on the state mean that occupational pension funds are an increasingly important part of ensuring adequate retirement incomes,” said Nathan Fabian, director of policy and research at the Principles for Responsible Investment, in a statement provided by a spokeswoman. “We need to improve governance oversight so those schemes are resilient to emerging risks like climate change. So we were gratified to see that the wide-ranging package of reforms announced included requirements to establish a governance and risk management system that considers ESG factors. Investors now know that considering ESG factors as part of their investment decisions can help them manage risk as well as identify new opportunities.”
Will Oulton, global head, responsible investment at First State Investments, said in an interview: “This is another big broom to sweep away the impression that ESG is at odds with fiduciary duty that still exists. I think IORP II is a really important piece of legislation.”
Other revisions include that providers of retirement plans wishing to transfer their portfolios across national borders must now first gain approval of a majority of participants and beneficiaries. They can then apply for regulatory authorization.