Published today, IOPS Supervisory guidelines on the integration of ESG factors in the investment and risk management of pension funds highlight a range of challenges to be met by pension funds governing bodies, asset managers and pension supervisors.

Environmental, Social and Governance (ESG) factors are key and timely issues for the investment and risk management of pension funds, whose consideration is relatively new in the landscape of regulatory frameworks of pension funds worldwide. They are also dynamically evolving and have different impacts and risks depending on the country.

It was therefore critical for the International Organisation of Pension Supervisors (IOPS), whose mandate is to act as the standard-setting body on pension supervisory issues, to develop supervisory guidelines on the integration of ESG factors in the investment and risk management of pension funds.

The IOPS supervisory guidelines propose, inter alia, that pension supervisory authorities should:

• clarify to a pension fund governing body or the asset managers that the explicit integration of ESG factors into pension fund investment and risk management process is in line with their fiduciary duties;
• require that a governing body and the asset managers involved in the development and implementation of the pension fund’s investment policy integrate ESG factors, along with all substantial financial factors, into their investment strategies;
• require that a governing body or the asset managers involved in the development and implementation of the pension fund’s investment policy will report to supervisory authorities how they integrate ESG factors in their investment and risk management process;
• require that a governing body or the asset managers of a pension fund disclose to members and stakeholders information about the pension fund’s investment policies in relation to long-term sustainability, including ESG factors, stewardship and non-financial factors;
• require that pension funds regularly provide reports on their engagement with investees as well as request companies in which they invest to disclose their ESG-related policies
• encourage a governing body or the asset managers of a pension fund to develop appropriate scenario testing of its investment strategy.

Get the book here