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ESG Factors in Pensions Funds Regulations: Why, How Far Have They Gone, and What Is the Potential for Improvement?

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Sustainable Finances and the Law

Part of the book series: Economic Analysis of Law in European Legal Scholarship ((EALELS,volume 16))

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Abstract

Several countries and regional organizations have basically been developing hard, comprehensive, and flexible regulations and guidelines specific to pension funds and asset managers regarding the integration of ESG considerations into their investment policies. Therefore, the author wants to understand what are the limitations and opportunities considering the particular nature and function of pension funds, their actual extension, and the potential for improvement.

This work is supported by national funds through the Foundation for Science and Technology (FCT), I.P. (Portugal), within the scope of the PTDC/DIR-OUT/32096/2017 project – “ART 63: The right to social security and the crisis – social regression as a normalization of the state of financial exception”. It was published in a preliminary version in Revista de Direito Financeiro e dos Mercados de Capitais (RDFMC), n.° 3, 2022. With thanks to Luciane Moessa for her contribution and support in the collection and treatment of the main regulations and her critical notes on this paper. See, for all, her repository of worldwide ESG financial regulations, including for pension funds: https://sis.org.br/en/esg-financial-regulations/.

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Notes

  1. 1.

    Mercer, European Asset Allocation Insights 2021, Sustainable Investment Survey, 2021. https://www.mercer.com/content/dam/mercer/attachments/global/gl-2021-sustainable-investment-survey-investing-in-the-future.pdf.

  2. 2.

    The respondents could choose multiple drivers.

  3. 3.

    Wolf (2003), pp. 291–292.

  4. 4.

    Harris (2000), p. 8.

  5. 5.

    Pezzey and Toman (2002), p. 3.

  6. 6.

    Harris (2000), p. 11.

  7. 7.

    Moreira (2019), p. 14.

  8. 8.

    IOPS, IOPS Supervisory Guidelines on the Integration of ESG Factors in the Investment and Risk Management of Pension Funds, IOPS (2019) 19.

  9. 9.

    OECD (2015, 2019); Scarpetta and Blundell-Wignall (2015); Queisser and Whitehouse (2005).

  10. 10.

    Queisser and Whitehouse (2005), p. 16.

  11. 11.

    Moreira (2019), pp. 14, 69, 75 ss.

  12. 12.

    Moreira (2019), pp. 70–71, 120 ss.

  13. 13.

    Moreira (2019), p. 71.

  14. 14.

    Aubry et al. (2020), p. 1.

  15. 15.

    In the United States, however, during the Trump Administration, the social dimension suffered a setback since retirement-plan fiduciaries were held to a “pecuniary” standard when selecting plan investment options therefore questioning the adequacy of social investing in defined-benefit plans covered by the Employee Retirement Income Security Act of 1974. The Biden Administration has suspended enforcement of that policy and a new rule “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” has been proposed, establishing that, when considering projected returns, a fiduciary’s duty of prudence may often require an assessment of the economic effects of the ESG and climate factors on the investment.

  16. 16.

    The IOPS (2019) 19–20, nevertheless, classifies the ESG factors as financial ones since they may materially impact the long-term risk and return of investments, a company’s valuation, and reputational risk as well as its operational efficiency (governance).

  17. 17.

    Steinbarth and Bennett (2018).

  18. 18.

    Aubry et al. (2020), p. 4.

  19. 19.

    Sarra (2022).

  20. 20.

    On the universal owner theory, see, for all, Lachance and Stroehle (2021), pp. 3–5.

  21. 21.

    https://www.eiopa.europa.eu/browse/sustainable-finance_en.

  22. 22.

    For example, Albertini (2013); Brammer et al. (2006), pp. 97–116; Busch and Friede (2018), pp. 583–608; Flammer (2015), pp. 1–20; Friede et al. (2015), pp. 210–233; Margois et al. (2009), pp. 403–441. Defending and proving a negative correlation, at least for public pension funds, Aubry et al. (2020), p. 8.

  23. 23.

    Lachance and Stroehle (2021), pp. 1–2.

  24. 24.

    Lachance and Stroehle (2021).

  25. 25.

    Aubry et al. (2020), p. 7.

  26. 26.

    Lachance and Stroehle (2021), pp. 5–8.

  27. 27.

    Lachance and Stroehle (2021), pp. 27–28.

  28. 28.

    UNCTAD (2020), p. 12.

  29. 29.

    UNCTAD (2020), p. 13.

  30. 30.

    Resolution No. 4.661, 25th May 2018, Brazil Central Bank.

  31. 31.

    Financial Sector Conduct Authority Guidance note 1 of 2019 (PFA).

  32. 32.

    Japan’s Stewardship Code, Principles for Responsible Institutional Investors—To promote sustainable growth of companies through investment and dialogue.

  33. 33.

    FSC Standards (No. 20).

  34. 34.

    Sarra (2022), p. 3.

  35. 35.

    Bauslaugh (2021), p. 6 ss.

  36. 36.

    UNEP FI, PRI (2019); Sarra (2022), p. 3.

  37. 37.

    Lewis and Gilmour (2022).

  38. 38.

    In the United Kingdom, additional and very demanding legal tests are required and were partially considered by the Supreme Court in R (Palestine Solidarity Campaign Ldt and another) v Secretary of State for Housing, Communities and Local Government (2020) UKSC 16.

  39. 39.

    Designated in accordance with the sectoral legislation referred to in Article 6(3) of SFDR and Directive 2013/36/EU.

  40. 40.

    Mark McVeigh v Retail Employees Superannuation Pty Limited ACN 001 987 739, NSD 1333 of 2018, Concise Statement filed September 21, 2019, McVeigh v. Retail Employees Superannuation Trust – Climate Change Litigation (climatecasechart.com).

  41. 41.

    Sarra (2022), p. 9. See also, on this case, Bauslaugh (2021), p. 6 ss; Mark McVeigh v Retail Employees Superannuation Pty Limited settlement statement, (2020), Microsoft Word – Statement from Rest 2 November 2020.docx (climatecasechart.com).

  42. 42.

    McGaughey et al v Universities Superannuation Scheme Limited and individuals listed, Claim form, USS, 20211027_14857_petition.pdf (climatecasechart.com).

  43. 43.

    Failure to provide information—The case study of Mr D | The Pensions Ombudsman (pensions-ombudsman.org.uk).

  44. 44.

    IOPS (2019) 23.

  45. 45.

    Trustees of schemes in scope must, as far as their abilities go, perform a scenario analysis assessing the impact on the scheme’s assets and liabilities, the resilience of the scheme’s investment strategy, and (when it has one) the scheme’s funding strategy for at least two scenarios—one of which corresponds to a below 2 °C temperature rise consistent with the Paris Agreement and one above. A scenario analysis must be carried out in the first year in which the requirements apply to the scheme and at least every three years thereafter.

  46. 46.

    EIOPA-BoS-21-127, 19 April 2021. opinion-on-climate-change-risk-scenarios-in-orsa.pdf (europa.eu).

  47. 47.

    Although this regulation does not cover national social security schemes treated by Regulations (EC) 883/2004 and (EC) 987/2009, considering that Member States are opening up parts of the management of compulsory pension schemes to financial market participants or other entities and since they are exposed to sustainability risks and might consider adverse sustainability impacts or ESG investment, Member States should have the option to apply this regulation with regard to such schemes in order to mitigate information asymmetries.

  48. 48.

    In Portugal, see Circular No. 1/2021 of February 26th, of the ASF.

  49. 49.

    Meins et al. (2020), p. 13.

  50. 50.

    Croce et al. (2011), pp. 61–64.

  51. 51.

    Croce et al. (2011), p. 64.

  52. 52.

    Croce et al. (2011), p. 65.

  53. 53.

    Hoft law as soft law with hard effects. Catarino (2012b), p. 131; Catarino (2012a), p. 158.

  54. 54.

    For all, see Saraiva (2022).

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Authors and Affiliations

  1. CIDEEFF, University of Lisbon, Law School, Lisbon, Portugal

    Rute Saraiva

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  1. Rute Saraiva
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  1. CIDEEFF, Law School, University of Lisbon, Lisbon, Portugal

    Rute Saraiva

  2. CIDEEFF, Law School, University of Lisbon, Lisbon, Portugal

    Paulo Alves Pardal

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Saraiva, R. (2024). ESG Factors in Pensions Funds Regulations: Why, How Far Have They Gone, and What Is the Potential for Improvement?. In: Saraiva, R., Pardal, P.A. (eds) Sustainable Finances and the Law. Economic Analysis of Law in European Legal Scholarship, vol 16. Springer, Cham. https://doi.org/10.1007/978-3-031-49460-4_1

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