Over fifteen years ago, the UK introduced requirements on pension fund trustees to disclose their policies on the extent (if at all) to which social, environmental and ethical matters are taken into account in selecting, retaining and realising investments. Since then, regulators around the world have increasingly required companies across all sectors to disclose information relating to environmental, social and governance (ESG) matters. The Institutions for Occupational Retirement Provision (IORPs) II Directive, which has recently been approved by the European Parliament, contains some of the strongest ESG requirements yet seen.
The Directive covers the EU occupational pensions sector which is responsible for investing over €3.2 trillion. It would require IORPs to disclose where ESG factors are considered in investment decisions, the relevance and materiality of ESG factors in a scheme's investments, and how ESG factors form part of the scheme's risk management system. An IORP will, however, comply with the requirement if it states that ESG factors are not considered in its investment policy. The recitals specifically refer to risks relating to climate change and the depreciation of assets due to regulatory change ('stranded assets'). Although not new, the concept of stranded assets has entered mainstream use over the last year or two, and this is the first express reference to stranded assets in EU legislation. Governance and risk management systems are also expressly required to accommodate ESG risks.
The Commission had originally proposed that IORPs only need consider "climate change, use of resources and the environment". This was initially rejected by the Parliament but after significant lobbying from the responsible investment community, it went further than the Commission had proposed and decided to require consideration of ESG issues generally.
Campaign groups have already said that the Directive has set a new precedent and called for the ESG requirements to be replicated in other EU legislation, including the Shareholder Rights Directive. Regulators and investors alike are increasingly focussing attention on corporate ESG disclosures under existing rules, and a number of shareholder resolutions and regulatory investigations are ongoing in the US and elsewhere.
The Council of the EU still has to approve the Directive, but it is expected to enter into force in early 2017 with a two year deadline for EU member states to implement. Given these timings, there is doubt over whether the UK will transpose the new requirements. That said, the UK already takes an active approach in this area. In September, the UK Pension Regulator's executive director for regulatory policy Andrew Warwick-Thompson warned trustees to 'wake up and smell the coffee' and not overlook ESG factors when assessing their portfolios.
The approved directive text can be found here.