The government is acting to help direct investments from UK pension funds into activities that fulfil environmental, social and governance (ESG) aims – such as investments in green energy. The Department for Work and Pensions (DWP) has opened a consultation that will help pension fund trustees include those factors, and their effect on the long term risk of assets, in their decisions.
Trustees have a ‘fiduciary duty’ to ensure the return on investment is sufficient to fund members’ pensions. That has often made them slow to switch investment from traditional sectors like fossil fuels. DWP says, “many trustees mistakenly believe that considerations such as those stemming from ESG causes are ethical concerns that can be taken into account when making investment decisions but never need to be taken into account as long term financially material considerations. There is also trustee confusion around what is meant by the term ‘ESG’.
“Due to these misunderstandings, trustees may not be making the best investment decisions for their scheme members, or utilising the full range of investments or the most appropriate investment strategies available to them.”
In most cases, barriers to social investment by pension funds were structural and behavioural rather than legal or regulatory. In 2015 The Pensions Regulator (TPR) amended its guidance to address these issues. But little has changed: DWP quoted a poll that found half of investors do not take ESG factors into account when making or advising on investment decisions, or think of climate change as a financially material risk to their investments or those of their clients.
Launching the consultation, the government said in its impact assessment that the ‘do nothing’ option has failed. It also said updating guidance issued to trustees would be insufficient. It said, the wording of the current regulations on investments undermines the message in the guidance by equating financially material concerns with ethical concerns. “As regulations carry more weight in the courts it is clear why Trustees would err on the side of existing regulations rather than the guidance.”
The government does not have powers to issue statutory guidance.
Instead, the consultation proposes to require trustees to update the Statement of Investment Principles for their funds, and show how they have taken account of scheme members’ views in developing the statement. That has to be done by October 2019. It also proposes to require trustees to publish their statements and, from 2020, to report on how they have acted on the principles set out in them.
The change could affect over 8,000 pension schemes in the UK. The consultation closes on 16 July