The government has issued draft regulations reassuring trustees that they can take environmental, social, or governance (ESG) into consideration in their investment decisions.
The Department for Work and Pensions (DWP) this week issued a consultation document aimed at clearing up confusion over the extent to which pension schemes can allow ESG concerns, including climate change, to influence investment decisions.
The DWP said it hopes that the changes will boost the allocation of capital to investment opportunities such as unlisted companies, green finance and social impact investment.
The consultation document said that despite guidance from The Pensions Regulator confusion continues over the responsibilities of trustees.
“Whilst there are clearly trustees who understand the issues, are actively engaging with them and are reviewing and, where necessary, amending their investment strategies accordingly, good practice appears to be far from universal,” said the document.
In response, the government is proposing to amend regulations to require that trustees update their statement of investment principles (SIP) to “set out how they take account of financially material considerations, including (but not limited to) those arising from ESG considerations, including climate change”.
Trustees will also be required to set out a separate statement on how they will take account of members’ views on ESG issues as well as future quality of life matters.
However, trustees will be required to have good reason to think the scheme members hold a particular concern and that any decision resulting “should not involve a significant financial detriment”.
The government consultation was clear this two-stage test would help ensure that the regulations do not open the floodgates to boycotts of particular companies or regimes.
It said that “where an investment issue is contested, as divestment from fossil fuels or from some regimes will generally be, the first stage of the test is not met.
“In these circumstances, the trustees should instead focus exclusively on financially material risks and opportunities, rather than seek to weigh up the relative strengths of views.
“Therefore, these proposals are not intended to give any support to activist groups for boycotts or divestment from certain assets.”
The consultation proposes that trustees report each year on how they have implemented the SIP, explaining any change made during the scheme year and the reason for the change.
Stuart O’Brien, partner at law firm Sackers, said the requirement for review “is really going to push this onto the agendas of DC trustees in a way that it, perhaps, hasn’t been to date”.
However, he added: “Whilst the regulations may be permissive and do not require trustees to actively seek member views in all cases, we fear that this regulation could prompt a rash of ill-thought through member surveys that distract trustees from focusing on ESG issues from a financial point of view.”
Bethan Livesey, head of policy at campaign group ShareAction, welcomed the proposals.
“For too long, many pension schemes have disclosed vague, high-level statements on their approach to ESG factors, and failed to report on what, if anything, they were doing to protect members from the rising investment risks of issues such as climate change,” she said.
