A new pensions directive was passed by the European Parliament on 24 November securing 512 votes (only 77 votes against and 40 abstentions), requiring EU workplace pension funds to consider environmental, social and governance (ESG) issues. This is considered a ‘landmark’ moment for responsible investment.

The new pensions directive stipulates that:

  1. ESG criteria is to be considered in investment decisions and their practical implementation should be disclosed in regular reports.
  1. Pension funds have to include their ‘stranded asset‘ strategy as part of their risk management procedure.
  1. The integration of ESG considerations will not be considered as conflicting with fund managers’ fiduciary duties. Fund managers will not be exposed to legal liability for an alleged failure to act prudently by prioritising ESG factors over financial risk returns in their investment decisions.

The effect of these rules is that fund managers will now have to consider ESG risks in their investments. Some investor groups have therefore welcomed this development for providing much needed clarity on the relationship between ESG issues and investment.

The new directive will cover European workplace retirement plans, which is estimated to be a market of around 125,000 plans with €2.5 trillion investment. The new directive needs to be passed by the European Council (which is expected to take place in early 2017), following which there will be a 2-year period granted for Member States to transpose it into national law.

Against a backdrop of increased media scrutiny over the management of pensions, and the growing awareness of the need to incorporate ESG issues into responsible investment, it will be interesting to observe if this marks the start of a trend of imposing mandatory ESG considerations in a diverse range of investment areas.

This post was prepared with the assistance of Ashleigh Humphries in the London office of Latham & Watkins.