There are several European sustainability legislations that will affect pension funds and their investment implications. Here are some of them:
- The **Regulation on sustainability-related disclosure in the financial services sector**² requires pension funds to disclose how they integrate sustainability risks and opportunities in their investment processes and products, and how they consider the adverse impacts of their investments on environmental and social factors. This regulation applies from 10 March 2021².
- The **Taxonomy Regulation**² establishes a classification system for economic activities that contribute to environmental objectives, such as climate change mitigation and adaptation, biodiversity protection, water and resource efficiency, etc. Pension funds will have to disclose the proportion of their investments that are aligned with the taxonomy criteria, as well as the methodologies and data sources they use. The first set of disclosure obligations will apply from 1 January 2022².
- The **EU Sustainable Finance Strategy**² sets out the vision and actions for the EU to achieve a carbon-neutral economy by 2050. It includes initiatives such as reviewing the fiduciary duty of pension funds, developing a green bond standard, creating a social taxonomy, enhancing corporate sustainability reporting, etc. Some of these initiatives are still under development or consultation².
The investment implications of these legislations will depend on the specific characteristics and objectives of each pension fund. However, some possible implications are:
- Pension funds will have to increase their transparency and accountability on how they manage sustainability issues in their portfolios and communicate this to their members and beneficiaries¹².
- Pension funds will have to assess and monitor the sustainability performance and risks of their investments, using reliable and comparable data and methodologies².
- Pension funds will have to align their investment strategies with the long-term goals of the EU Green Deal and the Paris Agreement, and consider the opportunities and challenges of the transition to a low-carbon economy².
- Pension funds will have to engage with investee companies and policymakers to promote sustainable business practices and policies².
(1) PensionsEurope’s Position paper on the EU Sustainable Finance Strategy.
(2) EU: New sustainability disclosures required for pension funds.
(3) Sustainability-related disclosure in the financial services sector.
EU sustainable finance legislation
You can find out more about these legislations by visiting the official websites of the European Commission and other relevant authorities. Here are some possible sources:
- The **Overview of sustainable finance**¹ page provides a general introduction to the concept and importance of sustainable finance, as well as the latest steps and documents related to the EU's policy framework and initiatives.
- The **Sustainable Finance Disclosures Regulation**² page lists the implementing and delegated acts that specify the details and requirements of the regulation, as well as links to other related documents and consultations.
- The **Sustainable finance**³ page provides an overview of the different aspects and dimensions of sustainable finance, such as corporate disclosure, taxonomy, green bonds, social economy, etc. It also links to relevant news, events and publications on the topic.
(1) Overview of sustainable finance.
(2) Sustainable Finance Disclosures Regulation.
(3) Sustainable finance - commission.europa.eu.
Challenges barriers EU sustainable finance legislation
There are various challenges and barriers to implementing these legislations, both for the policymakers and the financial market participants. Some of them are:
- A **data gap**⁴: There is a lack of reliable, comparable and consistent data on sustainability issues, both at the corporate and the financial product level. This makes it difficult to measure, disclose and compare the sustainability performance and risks of different investments.
- A **lack of recognized models linking financial and sustainability data**⁴: There is no common methodology or framework to assess how sustainability factors affect the financial returns and risks of investments, and vice versa. This creates uncertainty and inconsistency in the valuation and pricing of sustainable investments.
- A **lack of human resources with sustainability skills**⁴: There is a shortage of qualified professionals who can understand, analyse and integrate sustainability issues in their investment decisions and advice. This limits the capacity and quality of sustainable finance practices in the financial sector.
- A **costly taxonomy approach**⁴: The EU taxonomy is a complex and detailed classification system that requires a high level of technical expertise and resources to apply. It also suffers from gaps in crucial parts of the legislation, such as the social taxonomy, while being too prescriptive in others, such as the thresholds for environmental performance⁴.
- **Legal uncertainty**²⁴: There are still some ambiguities and inconsistencies in the interpretation and application of some of the legislations, such as the definitions of key terms, the scope of entities and products covered, the timelines and deadlines for compliance, etc. This creates confusion and risks for the financial market participants.
- **National fragmentation**⁴: There is a risk that some Member States may introduce additional or divergent requirements or standards for sustainable finance, such as national taxonomies or labels. This could undermine the harmonization and integration of the EU single market for sustainable finance.
(1) A Sustainability Crisis Makes Bad Law! - Towards Sandbox Thinking in EU ....
(2) Challenge barriers to a sustainable financial system.
(3) A Sustainability Crisis Makes Bad Law! - Towards Sandbox Thinking in EU ....
(4) Challenges for Financial Institutions with EU ESG Regulations - SIX.
Overcoming challenges barriers EU sustainable finance legislation
These challenges and barriers can be overcome by various actions and initiatives, both at the EU and the national level, as well as by the financial market participants themselves. Some of them are:
- Improving the availability and quality of **sustainability data**¹²: The EU is working on developing common standards and frameworks for corporate sustainability reporting and disclosure, such as the Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD). These will help to ensure that companies provide consistent and comparable information on their sustainability performance and impacts to investors and other stakeholders. The EU is also supporting the development of data platforms and tools to facilitate the access and use of sustainability data by financial market participants.
- Developing and promoting **sustainability models and methodologies**¹²: The EU is supporting the development of common methodologies and tools to assess and measure the sustainability performance and risks of investments, such as the EU taxonomy, the EU green bond standard, the EU climate benchmarks, etc. These will help to provide clarity and guidance on how to identify, classify and report on sustainable investments. The EU is also encouraging the adoption of best practices and standards for sustainability analysis and integration by financial market participants, such as the Principles for Responsible Investment (PRI).
- Enhancing the **sustainability skills and capacity** of financial market participants¹²: The EU is supporting the development of education and training programmes on sustainable finance for financial professionals, such as the European Institute of Innovation & Technology (EIT) Climate-KIC programme. These will help to increase the knowledge and competence of financial market participants on sustainability issues and how to integrate them in their investment decisions and advice. The EU is also fostering the exchange of information and experience among financial market participants on sustainable finance practices, such as through networks and platforms like the Platform on Sustainable Finance.
- Simplifying and streamlining the **taxonomy approach**²: The EU is working on improving the design and implementation of the taxonomy regulation, by addressing some of the gaps and challenges identified by stakeholders, such as the social taxonomy, the do-no-significant-harm principle, the technical screening criteria, etc. The EU is also aiming to ensure that the taxonomy is flexible and adaptable to changing circumstances and new developments, such as technological innovations, scientific evidence, market conditions, etc.
- Reducing **legal uncertainty**¹²: The EU is working on providing clear and consistent guidance and interpretation on some of the key aspects and requirements of the sustainable finance legislations, such as through delegated acts, regulatory technical standards, Q&A documents, etc. The EU is also monitoring and enforcing the compliance of financial market participants with these legislations, such as through supervisory authorities like ESMA.
- Preventing **national fragmentation**²: The EU is working on ensuring a harmonized and coherent implementation of the sustainable finance legislations across Member States, by promoting coordination and cooperation among national authorities, such as through networks like ESAs. The EU is also encouraging Member States to align their national policies and initiatives on sustainable finance with the EU framework, such as through recommendations like CSRs.
(1) Challenges for Financial Institutions with EU ESG Regulations - SIX.
(2) Strategy for financing the transition to a sustainable economy.
(3) Overview of sustainable finance.
European Green Deal
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