INTERVIEW with Matti Leppälä, Secretary General/CEO, PensionsEurope. For further expert opinions please use the question-level hyperlink.
As we prepare for the economic recovery, it is important to think about what a sustainable and fair recovery means in practice, to ensure greater resilience to further environmental and social crises in the future. The recovery should not support environmentally or socially harmful activities and the government response should use the right tools to encourage substantial contributions to environmental and social objectives. The Sustainable Taxonomy provides a framework for future recovery measures and its use in the definition of the recovery design would ensure the pathway towards our climate and environmental goals, including climate neutrality by 2050 and ambitious 2030 targets.
One may believe there is a trade-off between crisis management measures and pursuing the sustainable finance agenda. However, early evidence from the crisis suggests that certain sustainable investment strategies could offer better risk-adjusted returns and improve portfolio resilience as most sustainable funds and indices outperformed their mainstream counterparts in the first quarter of 2020. In practice, highly rated ESG companies tend to be less cyclical.
Until now, the focus of the European framework for sustainable finance has been set on the environmental dimension. As a result of the pandemic, we can expect the social dimension will be brought to the forefront, in particular impact on employees, customers, supply chains and local communities.
| Many jurisdictions currently work on ESG-related standards aiming at leadership in the field. Meanwhile, entities like the SEC Investor Advisory Committee urge developing jurisdiction-level standards to avoid other countries imposing their ESG-related requirements on US issuers. What impact do you expect from the competing standards, and what will it mean for asset owners in terms of ESG investing efficiency?
ESG regulation and standards widely differ around the world. Since large listed companies are internationally active and the EU ESG requirements for investors apply to their entire portfolio, international coordination in the development of ESG-related standards is still needed. The lack of global coordination and international standards may create important obstacles for investors with significant investments outside the EU and prevent them from appropriately integrating ESG considerations into their investment decisions.
It is noteworthy companies already use internationally recognised ESG reporting standards such as the standards of the Global Reporting Initiative (GRI), the requirements of the Task Force on Climate-related Financial Disclosure (TCFD) or specific disclosure standards (e.g. CDP, CDP Water). We would recommend aligning any new disclosure initiatives and/or standards with these existing and widely used standards.
On 18 October 2019, the International Platform on Sustainable Finance (IPSF) was launched with the purpose to exchange and disseminate information to promote best practices in environmentally sustainable finance; compare the different initiatives and identify barriers and opportunities to help scale up environmentally sustainable finance internationally; and enhance international coordination where appropriate. The members of the Platform are public authorities from Argentina, Canada, Chile, China, India, Indonesia, Kenya, Morocco, Norway, Switzerland and the European Union, representing almost half of the world’s greenhouse gas emissions. It is important to note that the United States and other relevant countries do not participate in the International Platform which is an important impediment to global coordination.
| Do you see the EU taxonomy as a helpful tool for pension funds to fulfill their fiduciary duties?
The EU Taxonomy is a helpful tool for pension funds since it will provide for a common understanding of what investments should be considered as sustainable. Indeed, the Taxonomy defines a general framework that will allow for the progressive development of a EU-wide classification system for environmentally sustainable economic activities. It is noteworthy the Taxonomy will not impact on financial materiality since a taxonomy compliant investment will not necessarily generate good returns. Also, the Taxonomy will only provide partial information on investments since it will not provide information on companies’ activities that are not taxonomy compliant.
| What challenges linked to the EU taxonomy implementation do you expect pension funds to face and do you have any suggestions on how to best address them?
The scarce availability of ESG data on investee companies is one of the major challenges faced by pension funds and all investors in complying with the new ESG disclosures requirements. The availability of ESG data is currently rather insufficient to enable investors to comply with the new regulatory requirements due to apply shortly: ESG data is not comparable, reliable and importantly, also quite expensive. Moreover, not all ESG data providers are transparent about the methodologies and raw underlying data used in their analysis. For this reason, we would welcome any initiative that promotes the development of an open source ESG data register at the EU level. The setting up of an open source EU ESG data register would help fill the gap between companies’ current reporting and the information investors need to be able to comply with the new regulations on sustainable finance. It would somehow mitigate some of the data challenges faced by investors, although only partly. As a first step, the database should focus on information related to the Taxonomy and Disclosure Regulation. This would include the share of revenue and capex that is Taxonomy-compliant and reporting against any potential mandatory adverse impact indicators. Ideally, it should also include information on how companies have met the “do not significantly harm” criterion and minimum requirements. At a later stage, the database could be extended to integrate reporting against the most relevant existing international standards, such as the TCFD. Over time this could be replaced by the single European NFI reporting standard mooted in the context of the NFRD review.
As mentioned in our answer to question 1, global coordination is needed: The EU ESG requirements for investors will apply to their entire portfolio including their non-EU investments and regulation widely differs around the world.
| Listed companies and large asset owners in UK will have to disclose in line with the TCFD recommendations by 2022, if the proposal included in the UK Pension Schemes Bill 2019/2020 is successful. What are your thoughts on this development?
For the moment, the TCFD disclosures are voluntary but there is increasing pressure on companies to report their financial climate risks, and how these are managed. The wide adoption of the TCFD framework is important as it would provide standardisation which helps investors to compare companies within sectors.
| brief bio
Matti Leppälä, Secretary General/CEO, PensionsEurope is the leading voice for funded pensions in Europe representing 24 European national pension fund associations covering pensions of more than 110 million Europeans and close to € 5 trillion of assets.
Matti has been the Chair and Vice-Chair in 2013-2018 of the Occupational Pensions Stakeholder Group of EIOPA and a member of the European Commission’s High Level Group of Experts on Pensions 2018 – 2019. He has also been the chair of the World Pension Alliance 2018 – 2019
Prior to joining PensionsEurope in 2011 Matti worked for 11 years for The Finnish Pension Alliance being responsible for EU and international affairs as well as investment policy and legal issues. In the 1990’s Matti worked for the Finnish trade unions in collective bargaining, labor law and social policy. During that time he was a member of the Board of pension insurance company Veritas. In 1986 Matti started his professional career at the Law Drafting Department of the Ministry of Justice in Finland.
Matti has a LLM and an Executive MBA in Insurance and Financial services.
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