Members of PensionsEurope are split over proposed reforms to the Sustainable Finance Disclosure Regulation (SFDR), with some pushing to embrace categorisation as a tool for transparency and others warning it could lead to high compliance costs.

In the association's position paper on the SFDR, which particularly focuses on a possible generic categorisation system, PensionsEurope revealed the divide. Indeed, some members believe IORPs must be excluded entirely from the categorisation system or even the SFDR.

A key concern is that categorisation might compel Institutions for Occupational Retirement Provision (IORPs) to compile a reduced Principal Adverse Impact (PAI) Statement – a change from the status quo, as IORPs can currently explain under Article 4 why they do not disclose this.

“This would lead to high compliance costs for these IORPs without any discernible benefits to their members and beneficiaries (due to the specificities of IORPs outlined above),” PensionsEurope stated.

Therefore, the association recommends that IORPs with employees below the current threshold of 500 should retain the ‘comply or explain’ option for proportionality reasons.

Advocates for the SFDR proposal in PensionsEurope, however, argued that it allows pension funds to communicate clearly and effectively with participants about their sustainability efforts.

Communication emerged as a key focus point in the debate, as ESG has become a central part of pension funds’ risk management strategies, and many funds communicate their ESG work to members.

For example, some have adopted carbon reduction targets or divestment strategies from fossil fuels. In parallel, in some member states, there is a large tradition of aligning pension fund investments with the values of their members and broader societal goals.

“As beneficiaries are becoming more vocal about their sustainability preferences, pension funds are responding by strengthening their responsible investment policies.

"In other member states, values of the members of the IORPs or broader societal goals are by law not allowed as investment strategy – as such, investment strategies are set by the plan sponsors alone and pension funds will implement these strategies without any further alignment to any own sustainability preference.”

As a result of the importance placed on sustainability communication, PensionsEurope stressed that communication with pension fund participants must remain possible, even if IORPs are not integrated into the categorisation system.

“Fair, balanced, and accurate disclosures, which include sustainability, are important to maintaining trust with members and beneficiaries,” it highlighted.

At an association level, PensionsEurope acknowledged that such a system could reduce greenwashing and prevent the misuse of Articles 8 and 9, which are often used informally as ESG labels, effectively serving as de facto classifications.

However, in its opinion, the model appears “ill-suited to pension funds” due to their highly diversified portfolios making it extremely difficult to meet the general minimum thresholds.

While PensionsEurope sees “merit” in introducing a generic categorisation system, its analysis shows the system would risk “misrepresenting the sustainability efforts of pension funds, increase compliance costs, and create reputational risks without delivering clear benefits to members or beneficiaries”.

It stressed that any shift toward a new categorisation system must therefore be based on a comprehensive cost-benefit analysis.

This analysis, PensionsEurope said, should also take into account the implications of recent regulatory developments, including the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), and the Taxonomy Regulation, which are likely to impact the availability and quality of sustainability data.

“At the very least, safeguards should be put in place to protect existing IORPs that are already aligned with Article 8,” it said.

Irrespective of these differing opinions, PensionsEurope supports the development of separate regulatory technical standards (RTSs) within the SFDR for each sub-sector. This, it said, offers a “more tailored and practical solution for IORPs”.

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