EU policymakers face major test of ambition to enable sustainable investment

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Full implementation of the COP21 agreement is estimated to cost $13.5 trillion in investment. [Yann Caradec/Flickr]

International cooperation at the end of 2015, illustrated by the COP21 agreement and the adoption of the SDGs, was the first major milestone. But now effective implementation has to be the priority and the EU’s pensions and investment sector will have a crucial role to play, writes Camilla de Ste Croix.

Camilla de Ste Croix is a senior policy officer at ShareAction, a charity that promotes responsible investment by pension funds and other institutional investors.

The Paris climate agreement reached by 195 countries at the COP21 last December, combined with the launch of the Sustainable Development Goals (SDGs), made the end of 2015 an unusually hopeful time in international politics.

The European Commission described the Paris agreement as ‘a lifeline, a last chance to hand over to future generations a world that is more sustainable, a healthier planet, fairer societies and more prosperous economies.’ Few of us would argue with that.

Now comes the hard part – implementation. The International Energy Agency estimates that full implementation of the Paris agreement will require $13.5 trillion of investment in energy efficiency and low carbon.

The UN Environment Programme Finance Initiative (UNEP FI) estimates that $5-7 trillion of investment per year is needed to achieve the SDGs, including investment in infrastructure, clean energy, water and sanitation and agriculture. With such staggering sums required to achieve these two global agreements, private finance clearly has a role to play.

With assets of around €12 trillion, the EU pensions and insurance sectors will be crucial in delivering the sustainable, long-term economic growth needed, as the Commission itself acknowledged in its Capital Markets Union Green Paper.

The revision of the Institutions for Occupational Retirement Provision (IORPs) directive presents a perfect opportunity to make sure that investments held via pensions can play their part. The directive covers the European occupational pensions market, which invests over €3.2 trillion on behalf of some 75 million Europeans.

As the global shift towards a low-carbon economy gathers pace, the revision of the directive is also an opportunity to make sure that the fund members’ savings are adequately protected during this transition.

The institutions are currently discussing amendments voted by the ECON Committee that would require pension funds to consider environmental, social and governance (ESG) factors in their risk assessment, risk management and Statement of Investment Policy Principles.

As fiduciary investors entrusted with other peoples’ money, managing potential risks to the value of investments is of utmost importance to pension funds. Seven EU countries already refer to ESG issues in national pensions legislation. But until now, there has been no EU-wide requirement that such risks be considered by pension funds creating a risk of regulatory divergence.

This is despite mounting evidence that ESG factors can have financial implications – and serious ones at that. The risk of stranded assets from investments in fossil fuels that must become un-burnable in order to stay within 2˚C of global warming is particularly high for institutional investors like pension funds that tend to be heavily invested in high-carbon companies.

The way in which pension funds manage these risks has huge implications not only for the planet, but for millions of Europeans’ retirement incomes. Too late, too sudden, the European Systemic Risk Board’s recent study into the transition to a low carbon economy, clearly states that an abrupt, unmanaged transition would be far more costly than a gradual, well managed one.

Smart funds already recognise this. Responsible Investment is neither new nor untested. Voluntary initiatives have been widely adopted, such as the UN-backed Principles for Responsible Investment, which has signatories representing over $50 trillion AUM.

Leading pension funds around the world, from the UK’s Environment Agency Pension Fund and giant state funds CalPERS and CalSTERS in the US, to the Swedish AP funds and ERAPF in France, recognise the financial sense of considering ESG risks.

The IORPs Directive, currently in trialogues and set for a 5 July plenary vote, is an opportunity for EU policymakers to change the game. Will the Brussels policy machine live up to its reputation for slow action and corporate capture? Or will it rebuild its position as a leader on climate change by supporting amendments which would enable pension funds to do what innovative funds globally are already doing – investing for the future into which their beneficiaries want to retire?

Despite the evidence, there is still some confusion amongst EU policymakers about whether ESG issues are a matter of ethics or good risk management. Some fear, erroneously, that these concepts are too new and untested to be put in legislation yet.

The time for hesitation is running out. Leaving Sustainable and Responsible Investment in the ‘too difficult to bother with’ box is no longer acceptable. This is why ShareAction is building a network of civil society organisations across Europe who support a more responsible, transparent investment system.

From Norway to the Netherlands, our European Responsible Investment Network (ERIN), launching in Berlin in June, will bring together campaigners, investors and policymakers to advance the case for Responsible Investment. Like any European-wide initiative, collaboration will be key. Bringing together a diverse coalition of organisations from across the continent, we aim to share best practice and put forward positive, practical approaches to engaging with investors, companies and savers.

The IORPs directive revision is a crucial first litmus test of whether the Capital Markets Union will contribute to building a sustainable economy. If EU policymakers fail this test, it will send a deeply troubling signal to investors; and mixed policy signals are guaranteed to dampen investors’ appetite to finance the projects needed. Now is the time to move from voluntary to mandatory measures to make sure laggards are not left behind.

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