In a significant development, the European Parliament passed a law on Thursday that mandates pension funds in the European Union to incorporate environmental risks into their investment strategies. The legislation, which received strong backing from most of the parliament, requires retirement fund managers to take into account the “environmental, social, and governance risks” associated with their investments. The law has already been agreed upon by EU governments, making its final approval a mere formality.
The passage of this law aligns with the European Union’s efforts to address long-term systemic risks stemming from climate change, extreme weather events, and volatile energy prices. Finance ministers have even discussed the possibility of implementing carbon stress tests for financial institutions. Under the new law, climate change and political factors will be given equal consideration to liquidity, operational, and asset risks when evaluating retirement funds.
This legislative milestone has been hailed as a major success in promoting sustainable investments. Sven Giegold, a German Greens lawmaker, expressed his satisfaction with the law, stating that it “paves the way for the introduction of fossil divestment by European pension funds.” The pensions industry in Europe manages assets worth approximately €3 trillion ($3.17 trillion) on behalf of around 75 million individuals.
Environmental conservation group WWF described the vote as a landmark moment for responsible investment in Europe, noting that it represents the strongest and clearest requirement on this issue found in any EU text. The new law aims to enhance the safety of the pension sector by introducing reporting and risk management requirements. It also encourages long-term investments and facilitates cross-border operations of funds by removing legal barriers and reducing costs.
PensionsEurope, the group representing pension funds, expressed support for the law, emphasizing that it will contribute to the industry’s sound development. The organization also appreciated the fact that the legislation does not impose additional capital requirements.
