The traditional legal position for trustees on socially responsible investments dates back to 1985 and is as set out in
Cowan v Scargill – the best interests of beneficiaries are normally their best financial interests. Trustees must not refrain from making investments due to the views that they hold. Only if all beneficiaries of full age consent to something different is it possible to invest ethically.
In practice, the law has lagged behind quite considerably compared to what is actually done on the ground. This has caused some uncertainty as to what is the correct approach for pension funds (and trustees) to follow and how hard pension trustees should push their fund managers in this area. The Myners Report in 2001 established, for example, the base mark for institutional investment in the UK with its best practice on investment decisions applying to pension funds and their trustees and it included ethical considerations. Because of this tension between the law and practice, there have been various cases to try to clarify the position.
In 2014 the Law Commission took a step forward in its report that pension trustees should take into account factors which are financially material to the performance of an investment, balancing returns against risks. This includes risks to the long-term sustainability of a company’s performance. These risks may arise from a wide range of factors, including poor governance or environmental degradation, or the risks to a company’s reputation arising from the way it treats its customers, suppliers or employees. So, although financial return should be the trustees’ predominant concern, the law is sufficiently flexible to allow other, subordinate concerns to be taken into account in certain circumstances.
Additionally the report set out a two-stage test outlining that trustees could taken investment decisions based on
non-financial factors, provided that:
They have good reason to think that scheme members share the concern
There is no risk of significant financial detriment to the fund.
In June 2018 the Department of Work and Pensions (DWP) launched its consultation to clarify environmental, social and governance (ESG) fiduciary duties and draft regulations have been published. The DWP has taken account of the representations by moving from the Law Commission’s suggestion that trustees must actively engage with scheme members to ascertain their views on ESG to an ‘optional policy’ on non-financial factors, including ESG and ethical concerns, with trustees being required to state to what extent the policy has been taken into account, if at all. This approach will be more manageable for the vast majority of trustees but perhaps somewhat disappointing for members and activists who would want pension funds to exercise their influence in a more ESG way.
Published: October 2018
Pensions Law Update - October 2018
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