It is well recognised internationally that the pensions sector can play a fundamental role as stewards and promoters of environmental and social sustainability. EIOPA for example has been implementing an ambitious strategic plan with the objectives that pension funds should manage and mitigate ESG risks through underwriting activity, reflect scheme member preferences for sustainable investments and adopt a sustainable approach in their investments based on principles of stewardship.
Pension arrangements in Ireland hold in the region of €125bn in assets, making those in control of pension investment decision-making an important potential force for change in climate matters. New regulation and likely member expectations will put climate change firmly on the agenda of every trustee board.
Climate change, specifically, impacts pension schemes with the coming into force of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (SFDR).
As "financial market participants", pension schemes, since 10 March 2021, have been obliged to make a number of disclosures on their websites and in other scheme documentation in relation to the trustees' consideration of sustainability risks and impacts. On the other side of the coin, as the customers of other financial market participants, trustees need to understand what the sustainability disclosures required by the SFDR actually mean to their scheme.
Climate change is one of the higher profile aspects of the environmental, social and governance (ESG) agenda. Directive (EU) 2016 / 2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORP 2) has laid the foundation to require schemes to consider ESG matters. ESG factors are recognised as being important for the investment policy and risk management systems of pension schemes. The directive obliges member states to require pension schemes to consider ESG factors in investment decisions as part of schemes' systems of risk assessment and management functions and to disclose publicly how ESG factors are taken into account, if at all, in investment matters in schemes' statements of investment policy principles and scheme information provided to new and prospective members. The directive also requires member states to permit trustees to take into account the potential long-term impact of investment decisions on ESG factors as part of investment in accordance with the "prudent person" rule.
IORP 2 was transposed into Irish law by the European Union (Occupational Pension Schemes) Regulations 2021 (the Regulations) on 22 April 2021.The Regulations give the Pensions Authority increased regulatory and supervisory powers to ensure compliance with the IORP 2 requirements, including those related to ESG matters. The Authority has not yet given guidance on its expectations of schemes regarding climate change and ESG matters. If the UK is anything to go by we expect guidance to be forthcoming and extensive.
We expect scheme members to pay increasing attention to schemes' climate and ESG-related disclosure obligations, and we expect members will engage more with trustees on these issues. In Australia and in the UK scheme members have brought, so far unsuccessful, legal proceedings against trustees relating to the adequacy of scheme disclosures on climate change risks. Members may also demand trustees invest or offer funds that invest in a more climate friendly way. Similar pressure may come from scheme sponsors aiming to beef-up their carbon credentials. Demands such as these raise potentially difficult issues for trustees in relation to their investment duties.
Trustees and scheme sponsors
on all aspects of pension scheme governance, regulatory compliance, investment duties and dispute resolution.
Clients and benefit consultants
providing training and drafting mandatory policies relating to climate change and ESG-related matters.
Member of ESG Ireland
a knowledge centre focused on delivering thought leadership on the integration of ESG factors into responsible decision-making frameworks