Under the revised EU rules on occupational pensions, pension funds will also be obliged to consider so called environmental, social and governance factors (also called ESG) into their investment decisions. This is an extraordinary move to pave the way for divestment from fossil fuels, given the major role played by pension funds in steering capital towards sustainable investments.
The concept of the ‘carbon bubble’ has been gaining acceptance already for some time: it refers to the overvaluation of fossil fuel reserves and related assets that will not be able to be used (hence the term ‘stranded assets’), should the world meet its stated objective of limiting climate change, as it must. In this context, the revision of these EU rules (i.e. the Institutions for Occupational Retirement Provision, or IORP, Directive) are a crucial regulatory step in giving incentives for investments to be diverted away from destructive economic activities. We have, indeed, good reason to celebrate.
The obligation to take ESG criteria into account is expected to affect the allocation of more than €3.5 trillion worth of funds, which are under the IORP’s responsibility. Through the negotiation process, the Green MEP Bas Eickhout managed to include fundamental changes in the revision of these rules, such as the clarification that no pension fund can ever be sued because of taking ESG factors into account (until now there was some legal confusion about whether investing responsibly could be interpreted as financially harmful for beneficiaries), and the requirement that pension funds need to make public if (and how) they take ESG criteria into account, which will be a powerful tool for the divestment movement to put pressure more easily on those not considering sustainable criteria. In addition, pension funds will now need to consider ESG factors when putting in place their risk-management systems, and this obliges them to assess the potential risks related to climate change and directly addresses the question of the ‘carbon bubble’ for the first time in EU law.
There is something else that should be remembered: doing this is in the interest of the members and beneficiaries of pension funds. First, because taking a longer term view of investment is the clever thing to do for pension funds. Second, because by not divesting from fossil fuels, pension funds would risk significant losses on their assets, which would severely harm the retirement provision of current and future pensioners.
Our success in getting ‘stranded assets’ recognised for the first time in EU law is a victory, a victory for the entire divestment movement and for those standing for the reorientation of investments in a responsible, sustainable way. There is no future for fossil fuels, otherwise there is no future. The divestment movement, after years of vigorous, global mobilisation, is now experiencing ever-growing momentum, achieving goals that, not long ago, were hardly imaginable. The way forward is set. Let’s ensure this is just the beginning.