Analysis: Pension funds embark on the implementation of SFDR | News

The latest installment of the European Commission’s Sustainable Finance Action Plan went live last month, leaving pension funds in major EU jurisdictions uncertain about the precise meaning of the rules, according to research from the PEI.

According to Morningstar, the SFDR (Sustainable Finance Disclosures Regulation) is an “essential element of the operationalization of the action plan and will more clearly distinguish between the different types of sustainable investment”.

The SFDR applies to a range of “financial market participants”, including asset managers, banks, insurers and pension funds. There was some initial opposition to the idea of ​​subjecting pension funds to the same rules as large commercial financial entities when in many cases pension funds are not competing for business, but as the said a Dutch lawyer to the IPE, this battle has been lost.

Lawyers at Eversheds in Ireland noted that SFDR has an “element of public disclosure rather than member-only disclosure” and that this “may not suit many Irish directors, but reflects a more general approach taken by European legislators in the pensions sector” .

Roma Burke, partner at consultancy LCP in Dublin, said that until recently the industry was still debating whether SFDR applied to pension funds, not helped by the fact that many law firms tended to focus on regulation from the perspective of asset managers.

She said trustees are now more familiar with SFDR, but there is still some uncertainty about the requirements for financial products and how they relate to pension plans.

“We hope the Pensions Authority will issue guidance,” Burke told IPE. “For a big change like this, you want a collective approach to compliance, and then it’s up to the pension plans to decide if they want to move to best practices.”

Although the SFDR entered into force on March 10, detailed rules clarifying how the higher-level requirements should be implemented are still in draft form, pending approval by the European Commission. Officially known as Regulatory Technical Standards (RTS), they will apply from 1 January 2022.

However, some disclosure requirements came into effect in March. These are requirements at the so-called entity level – as opposed to the product level – and at least some pension providers have made initial choices and the information associated with them.

Decisions with “negative impact”

Under Article 4 of the SFDR, for example, pension funds must publish information on the consideration of “negative sustainability impacts” of their investment decisions. They must either set out their due diligence policies on these “key adverse impacts” or explain that they are not considering them and why, and an opt-out for entities with more than 500 employees expires at the end of June. Considering the main negative impacts ultimately means having to report data on indicators to back this up.

In the Netherlands, around 20% of pension funds have committed to reporting major adverse effects under SFDR, according to an analysis of 60 SFDR-related pension fund decisions by advisory firm AF Advisors shortly after the 10 March. These include the five largest funds ABP, PFZW, PMT, PME and Bouw.

“All these funds have a pension asset manager who must also comply with the rules of the SFDR [because they are not eligible for an opt-out]. It also makes it easier for them,” said Ernst de Klerk, director at AF Advisors.

De Klerk found that more than half of the funds (35) in his study have so far decided not to report on the negative sustainability impacts of their investments. Most of the funds that pulled out did so because they believe there is still too much uncertainty about the rules, according to De Klerk.

“We will implement the remaining requests once the current gaps in the SFDR have been addressed.”

René van der Kieft, chairman of the PostNL pension fund

“We have been complying with the SFDR requirements since March 10, but have nevertheless opted for an opt-out because the RTS will come into force at a later date,” said René van der Kieft, chairman of the PostNL pension fund, about the report. main regime of adverse effects. “We will implement the remaining requests once the current gaps in the SFDR have been addressed.”

Jaap van Dam, chief investment officer of pension fund KPN, said the fund would not say it would be in full compliance with the SFDR “without being fully aware of the content of the regulations”.

He added: “Therefore, we do not currently consider reports of the most significant adverse sustainability impacts, as set out in Article 4 of the SFDR, nor secondary legislation which has not yet been published. .”

In the Netherlands, the issue of an Article 4 waiver is complicated by the fact that the so-called IMVB convention – a responsible investment code to which many Dutch pension funds are signatories – includes due diligence requirements. The regulator said it oversees compliance with the SFDR and not the covenant, but stresses that pension providers “must provide correct information and avoid conflicting reports”.

In Denmark, pension mutual Velliv has a webpage dedicated to entity-level SFDR disclosures, including how it seeks to “minimize the most significant negative impacts its investments may have on sustainability factors.”

Classifications “light green”

The SFDR also requires financial market participants to rank financial products according to the degree of sustainability ambition. There are three categories, one for products “promoting environmental or social characteristics”, one for products with sustainable investing as an investment objective, and another for all other products. It is now common practice to refer to it according to the sections of the regulatory text, i.e. respectively Article 8, Article 9 and Article 6. The Commission has not yet clarified what precisely constitutes “promotion” in the context of Article 8.

Although additional reporting requirements are imposed for all products, they are heightened for Article 8 and Article 9 products. The latter are also referred to as “light green” and “dark green” respectively.

For pension funds, the “product” is the pension scheme itself.

In the Netherlands, most pension funds have opted for the “light green” designation. In its research, AF Advisors identified 42 pension funds that characterized their pension plan as promoting sustainability. Only 10 of the pension funds in the AF Advisors study opted for an Article 6 classification.

In December last year, Dutch regulator DNB told pension funds that although they could in principle belong to one of three categories, in practice they would probably have to be referred to as an ‘other’ product. or possibly a product of Article 8.

Post NL is one of the pension funds that opted for the Article 8 categorization. “In our investment portfolio, we mainly invest in mandates and Article 8 funds,” said Van der Kieft. He also said the fund wants to add more Article 9 products.

Thomas H. Kjærgaard Head of ESG, Velliv

At PWRI, the Dutch pension fund for disabled workers, administrator Xander den Den Uyl said his fund’s pension scheme would be Article 8 compliant “from 2022”.

In Sweden, most of the retirement savings products on offer fall into the “light green” category, according to Anna Viefhues, head of sustainability at pension provider AMF.

The AMF itself has categorized its traditional pension insurance as well as the majority of its own funds, explains Viefhues on the AMF website. She writes that while returns to the supplier’s customers always come first, the AMF has clarified that its sustainability work must promote, among other outcomes, a transition to reduced carbon dioxide emissions by beneficiary companies.

At Velliv in Denmark, head of ESG Thomas Kjærgaard told IPE that the pension fund has had useful discussions with peers from the Danish industry association on how to approach SFDR. He said that because there was still some uncertainty over product definitions and data, Velliv had classified “cautiously and probably a bit conservatively.”

On its website, Velliv said its impact-based product Aftryk “promotes environmental and social characteristics but does not aim for sustainable investing” – Article 8, in other words.

A large minority of Dutch pension funds in AF Advisors’ research had not disclosed any information on their website related to SFDR. Strictly speaking, that means those funds are now in violation and could face regulatory penalties, De Klerk said. However, AFM, the Dutch Financial Markets Authority, has indicated that it will not strictly enforce SFDR compliance of pension funds until the RTS are finalized.

According to Ireland’s Eversheds, some interpretive issues will only be fully resolved once IORP II is implemented, “but in the meantime trustees should take a pragmatic approach to applying SFDR to their schemes” .

SFDR also seems to appeal to those outside of its scope. In Sweden, AP7 told IPE that it “voluntarily aligns itself with the reporting standard that has been developed”. In Finland, meanwhile, a spokesperson for Ilmarinen told the IPE that the SFDR does not currently apply to it because it is an earnings-related pension insurance company, but that the government is preparing legislation to subject these insurers to regulation.

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