How to define ESG objectives in ethical investing? – PRIIPs EOS consultation

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I am helping out on a project to start a second pillar pension fund for the medical profession in Belgium using ESG-friendly or impact investing principles, as a board member of FairFin. Unfortunately, none of such “ethical” funds exist today. Belgian GPs receive 4,790 euros annually from the government if they respect the standard tariffs, and have to invest this money in a fund of their choice from a rather limited list. Getting consensus on what such a fund should invest in, within FairFin and with the group of potential scheme members, is harder than we thought, as there are many divergent lists out there as to what constitutes an ethical investing policy.

In a European context, the implementation of the “PRIIPs” Regulation on packaged investment and insurance products would have been a great opportunity to move towards an EU harmonised framework of ESG funds; however this clearly was beyond the mandate given by the European Commission to the European Supervisory Authorities (ESAs). The ESAs recently closed a consultation on this issue ahead of their technical standard – my full response to the consultation follows below.


Question 1

Yes, the policy requirements can be expanded within the mandate.

The lack a of mandate to provide guidance on labels or moving towards a harmonized European definition of EOS (or ESG) hampers effective disclosure, and should be addressed in secondary legislation (see Q3) or be considered a priority for legislative review.

The proposed inclusion of EOS impact in the IPS might help to prevent greenwashing, but would benefit from an explicit disclosure of the nature of underlying assets (investments or bets) beyond the asset allocation disclosure as foreseen in Technical Advice 4, as well as the correlation of those assets in terms of impact on the stated EOS objectives, which currently doesn’t seem to be included in the proposed framework (Technical Advice 3). Otherwise, without such an addition, the EOS-marketed PRIIPs might only marginally contribute to the stated EOS objectives and still be classified as EOS PRIIPs specifically targeting those objectives (but having a minimal impact).

Question 2

The product’s performance on EOS factors should be reflected through future versions of the KIID, just as financial information is being updated periodically. This is even more important without a common definition of EOS, as EOS definitions evolve over time (e.g. 2009 is typically considered a watershed moment in the field of climate finance, after which a fund manager cannot claim being unaware of the EOS sensitivities of continued fossil fuel-based energy production).

Therefore, both EOS ambitions and EOS impact need to be re-evaluated regularly and might lead to updates of the KIID. The KIID should be a living document, not just a one-off disclosure requirement at the time of sale (which should be available throughout the lifetime of the product as foreseen in Technical Advice 5).

Question 3

Within the mandate given by the Commission, the principle-based policy presented in Technical Advice 4 could be expanded to include sample checks by supervisors or benchmarking provisions, without moving towards a full monitoring regime as analysed in Policy Option 3.3 in the Preliminary Impact Assessment. As consumer associations and EOS-oriented campaign groups do not have the capacity to follow-up on individual products, such a regime would be the only way to reduce the probability of public scandals, which would have a detrimental impact on the reputation of EOS investments.

Question 4

The ESAs should consider issuing Level 3 Guidance, to allow supervisors to defining best practises for spot checks and benchmarking of EOS calibrations between funds.